* Essar downplays Vodafone Essar listed shell move -sources
* Change follows objections from Vodafone -sources
* Essar issues statement saying no change in its plans
(Writes through with new details, including Essar downplaying
not abandoning plan and management accepting scheme will not
happen before May deadline)
By Hugo Dixon, Editor, Reuters Breakingviews
LONDON, Jan 31 Indian mobile phone operator
Essar is downplaying plans to inject part of its 33 percent
stake in the Vodafone Essar venture into a listed shell company
after objections by its partner Vodafone (VOD.L), according to
people familiar with the situation.
Instead, the partners have agreed to appoint two investment
banks to value the stake in the Indian mobile operator as a
precursor to Essar deciding whether to sell it to Vodafone.
Essar has until May to decide whether to exercise options to
sell the stake.
Essar was previously pushing a plan to inject an 11 percent
stake into Indian Securities (ISL) ISEC.BO, a listed company
it controls. It argued that this would reveal its true value.
An Essar spokesman denied a decision had been taken to call
off the planned injection of its Vodafone Essar stake into ISL.
"There is no change in our plans to merge Essar
Telecommunications Holdings Pvt. Ltd. with India Securities," a
spokesman said. "As we have stated before, the investment banks
are free to choose whether or not to consider the listed value
of ISL in their fair value determination."
Management, however, now accepts that Vodafone's tactics
mean it will no longer be able to complete the merger before the
May deadline, according to a person familiar with the situation.
Vodafone saw Essar's plan to inject the stake into ISL as an
attempt to artificially inflate the stake's value as a precursor
to selling it, arguing that ISL was a highly illiquid vehicle.
When Vodafone acquired a 67 percent stake in Vodafone Essar
for $11.1 billion in 2007, it gave Essar two put options over
its 33 percent stake. The first allows Essar to sell the entire
stake to Vodafone for $5 billion.
The second allows Essar to sell between $1 billion and $5
billion worth of Vodafone Essar shares at a "fair market value".
Essar has until May to decide whether to exercise the
options. Under the second option, fair market value is supposed
to be determined by two investment banks, one appointed by each
partner. If the two banks don't agree, a third investment bank
would be appointed to adjudicate.
The value paid by Vodafone, under this option, would be its
fair market value plus around $700 million to take account of
the fact that Vodafone Essar is carrying extra debt as a result
of its push into 3G mobile technology.
It is this valuation process that the partners have now
After Essar said it planned to inject its stake into ISL,
Vodafone complained to the Indian court that the merger
documents for the deal were not clear. It also complained to the
Bombay Stock Exchange that there were oddities in ISL's
According to two other sources, Essar has mandated Standard
Chartered and Vodafone has hired Goldman Sachs.
Vodafone declined to comment.
-- BREAKINGVIEWS-Vodafone wins first round in Essar war
(Additional reporting by Kate Holton in London and Devidutta
Tripathy in New Delhi; Editing by Andrew Callus and Alexander