Piramal Healthcare buy Vodafone stake from Essar. What does it mean for its shareholders'?

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Piramal Healthcare buy Vodafone stake. Corporate mis-match?
Piramal Healthcare, owned by Ajay Piramal will buy 5.5% stake in Vodafone - Essar for approximately $640 million. Piramal Holding will buy the stake from Essar Teleholdings, which holds about 11.1% stake in the company.

Rajesh Ladha, CFO Piramal Healthcare, was quoted by the newspaper Economic Times as "We can generate better returns in the short to medium term this way than by keeping our money in banks or liquid funds." Piramal will not contribute towards the day-to-day administration of the company, it will also not get a board seat.

According to the deal, Vodafone - Essar has been valued at $11.6 billion, this is much lower than what Essar had got from Uk based Vodafone had valued the company at $16 billion, as Essar reduced its stake in the company at the start of the year.

After the deal Vodafone's stake in the Indian company came to 75.35%. Since this was above the regulatory requirement, which state that FDI investment cannot be more than 74% in Indian telecom companies.

This deal there will be some respite for the Vodafone as it will be able to meet the regulatory norm of the holding. Vodafone also made announcements to the effect that it will be coming out with its IPO some time next year.

The IPO will provide Piramal an option to exit while claiming some profit provided the valuations do not fall any further.

Some television reports claimed that Vodafone has also agreed that if there is no IPO in two years, then Piramal will get $900 million in cash. Though, Piramal Healthcare any such clause.

The transaction was completed with HSBC as the adviser.

VIEW: There are two important things that should be taken note off.

First, the deal looks a bit risky from the Piramal Healthcare shareholders' perspective. An investment in telecom sector by a pharmaceutical company doesn't inspire a lot of confidence. There is every possibility that on an industry level the telecom industry has reached its low but if the over all economy goes for a down swing, this investment of Piramal Healthcare will result in bitter loss.

Second, few months back, the CEO of Vodafone had said the company can consider an IPO to meet the regulatory obligation. But now that it has come out as a written statement, the company is serious. This is good news for equity investors as they will get a chance to buy all the major telecom companies in India.


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