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The thorny negotiations between Vodafone and the Essar have finally resulted into a strong partnership agreement with both the partners gaining. Here's a look at the gains of Vodafone and Ruias-promoted Essar, and at some of the unsettled issues.

The divorce settlement of $415 mn that Essar received from Hutchison International is meant not for dragging the joint venture into a legal tangle. This means a smooth running of the operations of Vodafone Essar in the country as Essar cannot threaten partners with court orders, though Hutchison International shareholders reportedly raised eyebrows about the booty offered to Essar to silence them pre and post transaction. Both Vodafone and Essar stand to gain.

As Ravi Ruia, chairman of Vodafone Essar, pointed out, the guaranteed exit money that it can grab between third and fourth anniversaries of completion of the deal will ensure additional cushion to its Indian partner during an adverse market scenario. The $5 bn is just a minimum amount ensured as Essar has an option to sell between $1 bn and $5 bn worth of Vodafone Essar shares to Vodafone at an independently appraised fair market trading value. Depending on the market conditions, the enterprise value of Vodafone Essar could escalate, as India will have more than 500 mn telecom users by 2010-2011, when Essar gets a chance to dilute the stake as per the present agreement.

The shareholders agreement has also clearly pointed out the first right of refusal. If Vodafone is keen to exit India at some point of time, Essar will have the first right of refusal, putting the Ruias on a pole position. When Hutchison International decided to exit from the Indian venture, the Li–Kashings had contested the first rights of refusal of Essar, the minority shareholder.

Essar lost its claims for joint management of operations, and as per the shareholders' pact Vodafone will have operational control of Vodafone Essar, and Essar will have rights consistent with its shareholding, including proportionate board representation.

Fresh Issues
Vodafone and Essar will have to fight together to convince the Foreign Investment Promotion Board (FIPB) to convince the shareholding structure of Vodafone Essar, following the stake sale. At a recent meeting, FIPB did not give the green signal to Vodafone's application to pick up its 52% stake. Both Essar and Vodafone are confident that the Indian venture will be in line with the local regulations.

Over a period of time, the proud Hutch brand users will get to use Vodafone services and a new brand. Vodafone Essar will continue the Hutch brand for some time and Vodafone will appear in India as a sub-brand to start with and replace Hutch later. However, phasing, out a strong brand like Hutch from Indians will not be an easy game and requires additional funds. But Vodafone has done this successfully in other emerging markets, says Arun Sarin of Vodafone Essar.

Emerging Telecom
The strengthening of the partnership will also assist the Ruias, who are spearheading in telecom infrastructure and telecom retail businesses, as Essar could become the preferred partner for Vodafone Essar. To spruce up the retail telecom business, Essar is planning to set up 2,000 multi-branded telecom retail outlets with an investment of Rs 1,500 crore over the next five years. The communication hub would offer convergence of all telecom products and services including mobile-based gaming and entertainment, repairs, etc. Besides, Essar has recently created a separate company-Essar Telecom Infrastructure for constructing telecom towers that will be leased out to private operators.

For Arun Sarin, this is one of the most complex deals he has ever done. But this is an important assignment because it is a must for the telecom giant to establish itself in the fastest growing telecom market in the world. With the promise of rural expansion in a big way and employment opportunities, Vodafone has already convinced many stakeholders in India. Now, it is time for more action!

Baburajan K
baburajank@cybermedia.co.in