UPDATE 2-Essar decides against Vodafone JV stake IPO-sources

Thu Aug 26, 2010 10:06am EDT

* IPO could have raised about $1.5 billion - sources

* Vodafone Essar JV has equity value $9-$12 bln - sources

(Recasts, adds details)

By Denny Thomas and Pratish Narayanan

HONG KONG/MUMBAI, Aug 26 (Reuters) - Indian steel-to-shipping conglomerate Essar Group has decided not to proceed with an initial public offering (IPO) of its stake in its telecoms venture with Britain's Vodafone (VOD.L), sources familiar with the matter told Reuters on Thursday.

The decision comes after a dozen investment banks last month participated in a beauty parade to bag a mandate for the IPO, which could have raised about $1.5 billion, sources previously had told Reuters.

"They are not going ahead for now," a source told Reuters. The source did not go into detail as to why Essar had decided to postpone the plan. The sources declined to be identified because they were not authorised to speak to the media.

Essar has been in talks with banks to explore options, including an IPO, for its stake in Vodafone Essar, India's No.3 mobile company, [ID:nSGE66G026]. Vodafone and Essar Group declined to comment.

The Vodafone Essar joint venture has an estimated equity value of between $9 billion and $12 billion, two of the sources told Reuters and an enterprise value of about $15 billion.

An IPO would have given the joint venture cash to expand in India's highly competitive but fast growing telecom market.

Vodafone stormed into the Indian market in 2007 shelling out $11.1 billion to buy a 67 percent controlling stake in Hutchison Whampoa Ltd's (0013.HK) mobile business in India, in which Essar had been a partner.

But it hasn't been smooth sailing for Vodafone, the world's top mobile operator by sales, as it sought to make India a key territory in its growing emerging markets portfolio.

The deal gave Essar the option to sell its 33 percent stake for $5 billion by May 2011 or at a market-determined price, whichever was higher.

PUT OPTION

Vodafone has an agreement with Essar that gives it first option to buy out the Indian company's stake if some or all of the holding is put up for sale. It was not clear what will happen next but nothing has started on the exercise of Essar's put option, one source said.

In May, Vodafone signalled increasing frustration with its Indian unit, taking a charge of 2.3 billion pounds ($3.6 billion) due to fierce competition and rapidly escalating spectrum costs.

Essar, controlled by billionaire brothers Shashi and Ravi Ruia, needs funds to expand and still sees opportunities in the world's second-largest wireless market.

The Ruia brothers founded Essar in 1969 and, since winning a contract to build a breakwater at the Chennai port in southern India, have rapidly expanded the group to include shipping, telecoms, steel, refining, and energy. The brothers are worth a combined $13 billion, according to Forbes.

The group recently raised close to $2 billion by listing its energy business in London.

Indian telecoms firms, including industry leader Bharti Airtel and second-ranked Reliance Communications, are embroiled in an intense price war that has hurt profits and dragged down their market value.

Vodafone secured the 2007 deal after beating rivals in a high-profile auction which cleared the way for it to expand in the world's second-fastest growing telecoms market.

Chief Executive Vittorio Colao, frustrated with Indian regulations covering the auction of 3G spectrum licences, has said that India's telecoms rules did not make sense.

India is signing up new mobile subscribers at a monthly average of 16 million, but call prices have fallen to as low as 0.4 U.S. cents a minute amid stiff competition in the crowded 15-operator market.

($1=.6460 Pound)

(Reporting by Denny Thomas, Pratish Narayanan and Kate Holton; Editing by Chris Lewis, Jacqueline Wong and Mark Potter)