BREAKINGVIEWS - Vodafone right to oppose Essar telecom listing

A pedestrian passes a Vodafone store on Oxford Street in central London, November 10, 2009.

-- The author is a Reuters Breakingviews columnist. The opinions expressed are her own --

By Una Galani

LONDON (Reuters Breakingviews) - Vodafone's list of woes in India keeps getting longer. The UK-listed telco already faces stiff competition in the country and is fighting tax authorities over $2 billion of disputed claims. Now it has fallen out with its joint venture partner Essar over the family-controlled group's desire to back part of its 33 percent investment in Vodafone Essar into a closely-held investment firm.

As part of the UK telco's aggressive $11 billion push into India in 2007 which brought the pair into partnership, Vodafone granted Essar an option either to sell its entire shareholding for $5 billion or sell between $1 billion and $5 billion worth of Vodafone Essar shares to Vodafone at an independently-appraised fair market value. The option expires in May.

Essar now wants to list 11 percent of the joint venture that it holds through privately owned Essar Telecommunications into a vehicle called India Securities Limited, which has a market capitalisation of just $320 million. By doing so, a market value, of sorts, would be put on the joint venture. Vodafone says that only five percent of the shares of ISL, post the merger, will be freely traded. Small trades could prompt big price moves.

The plan suggests that Essar, which has borrowed against its holding, wants a partial exit and is trying to inflate valuations. After all, a price tag of $5 billion for a full exit looks generous given that shares Indian telcos have plummeted in the past three years. Rival Reliance Communications has lost 60 percent of its value in that time. A similar decline for Vodafone Essar would value Essar's 33 percent stake at $2 billion.

Vodafone clearly fears that putting a market value on the joint venture could influence any independent assessment, and that -- in these circumstances -- it could be misleading. The Indian courts will make the final decision on whether Essar can proceed. If Vodafone fails to stop the listing, it could bump up the cost of its already-expensive Indian adventure. But questions about the relevance of the illiquid security are now firmly on the agenda. And that is where they should be.

CONTEXT NEWS

-- Vodafone said on Jan. 18 that it objected to a move by its Indian partner Essar Telecom to list an 11 percent stake in their Indian mobile joint venture, Vodafone Essar. The UK-based mobile operator has written to the Bombay Stock Exchange and the Securities and Exchange Board of India to express its concerns.

-- Essar owns a total 33 percent of Vodafone Essar. It holds 11 percent of that stake through Essar Telecommunications, a privately-held Indian vehicle.

-- The Indian group has an option which expires on May 7 to sell all or part of its 33 percent stake in the joint venture back to Vodafone for up to $5 billion. Essar can sell the entire stake for that amount or sell between $1 billion and $5 billion worth of Vodafone Essar shares to Vodafone at an independently-appraised fair value.

-- Vodafone granted the option to Essar in 2007 as part of its acquisition of a 67 percent stake in Hutchison Essar, for which Vodafone paid $10.9 billion in cash. The operator has since been rebranded Vodafone Essar.

-- At 1230 GMT Vodafone shares were flat at 178.5 pence.

(Editing by Robert Cole and David Evans)