Vodafone Plc announced that Piramal Healthcare, Ajay Piramal’s group flagship, will pay $640 million or about Rs 2,900 crore to acquire a 5.5% stake in Vodafone Essar. This will help raise cash for Vodafone as well as allow it to remain compliant with India’s foreign direct investment rules for the telecom sector, which mandate a 74% foreign shareholding cap.
In July 2011, Vodafone agreed to buy the Essar group’s 33% stake in Vodfaone Essar, ending their long, and more recently fractured, partnership. On 1 July, Vodafone announced that it will buy the 33% stake held in Vodafone Essar, by the Essar group, for a total cash outflow of $5.46 billion or about Rs 25,000 crore. Of this a 22% stake sale took place in July and the remaining stake was to be purchased by February 2012.
At that time, Vodafone had said that it will need to divest a 1.35% stake in Vodafone Essar so that it stays compliant with India’s regulations. But it has chosen to divest a higher stake to Piramal Healthcare.
While it bought the Essar’s stake at a valuation of about $16.5 billion, it has sold a 5.5% stake to Piramal Healthcare, at a valuation of $11.6 billion, or a discount of about 30%. This could be explained by the premium being paid to get the Essar group to relinquish control and Vodafone’s eagerness to close that deal.
Vodafone said in a statement that Piramal has several exit choices, including participation in a possible initial public offering by Vodafone Essar, and selling its stake back to Vodafone (if the FDI policy changes).
Piramal Healthcare’s shareholders may wonder at what shape their company is taking. Piramal Healthcare ran a growing and profitable pharmaceuticals business, which was acquired by Abbott Laboratories for about $3.7 billion. Some of the money was returned by way of a buyback, some will be used to fund the group’s diversification into financial services, and now this investment in Vodafone Essar.