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Tuesday, February 20, 2007

Vodafone India: Partnership Problems Already

As each day goes by more and more revelations seem to break about the issues that Voda are going to have dealing with Essar in India. In yesterdays Financial Times, we had a long interview with Naguib Sawiris of Orascom and Weather Investments saying that Voda should buy Essar out because they are a royal pain in the neck.

Overnight from India, we have an interview with Vikash Saraf the CEO of Essar Teleholdings saying that the Essars want equal management footing with Voda. We also have the revelation in the Times that the Essar want to unravel the deal with Bharti and the Essars themselves provide the long distance and international transport for the network calls. There was also talk at the weekend of the Essars wanting a put option guaranteeing an exit price. I'm expecting soon to hear that Essar want keep their name and not Voda's on the venture.

This is before we hit the big issue which is what to do with BPL Mumbai. BPL Mumbai has been a poor performer over the last twelve months and was a source of many of the frictions with HTIL. It makes no sense for the Essars to be competing against Voda in any key city or circle and still remain a partner.

Arun Sarin talked last week of wanting Essar to remain as a partner. I said then and still believe today that Voda would prefer the Essars out of Voda India. Arun Sarin also said his Plan B was to buy the Essars out at the same price as HTIL, which is something that I believe that the Essar do not want – unbelievably I think they want a premium to HTIL and by being a founder member of the awkward squad that they will get that premium. I hope that Arun has a Plan C which is a way to force the Essars out at a reasonable price.

Arun Sarin has not put a foot wrong so far in phase 3 of his Indian adventure, (phase 1 – RPG Cellcom was a disaster, phase 2 – Bharti seems to have worked out in the end) but he probably knew all along that dealing with the Essars would be the hardest part of the deal. I believe that Voda have enough challenges going forward without having partners causing trouble at every turn and with every decision the board wish to make.

The other partnership problem that Voda have is with the silent partners, Analjit Singh (8.75%) and Asim Ghosh (6.25%) who received loans from HTIL when they bought out the Kotak Bank group’s stake in early 2006. There is a good possibility that Vodafone might rollover the funding for the additional stake buyout. I think this is slightly strange with Voda providing loans for someone to buy equity in the joint venture. I know the original issue was that HTIL needed local partners to keep within the Indian foreign ownership limits. However it would be strange for Voda to be providing loans for the future CEO of Voda India, Asim Ghosh, especially when his stake in the venture is valued at around US$1bn given the EV of the Voda transaction – that is unless there are some big conditions on the loan. For instance, they must immediately sell at the “market price” to Voda if the foreign ownership laws change - a little bit of transparency on the size and terms of these loans would be nice...