The cash-rich Piramal Healthcare has agreed to pick up an additional 5.5 per cent equity in Vodafone India Limited from ETHL Communications Holdings Limited, for a cash consideration of about Rs 3,007 crore (approximately £385 million).

This takes Piramal Healthcare's total shareholding in VIL to 11 per cent, while it marks the exit of Essar as Vodafone's local partner.

The deal values Vodafone India's assets, as on March 31, 2011, at an estimated Rs 59,200 crore (£7.6 billion), a Piramal Healthcare note said. Vodafone's stake in the Indian arm now stands at 64 per cent, against over 69 per cent before the deal. The Piramal transactions follow the settlement between Vodafone and Essar over the sale of Essar's approximately 33 per cent stake in VIL, announced in July 2011.

Further, the deal has exit mechanisms for Piramal, including both participation in a potential initial public offering of VIL and a sale of its stake to Vodafone, the company said. The rationale behind increasing stake in the telecom company is a continuation of Piramal Healthcare promoters' stated intention to invest in high-growth areas for the short or medium term, to ensure better returns, a company insider said.

The funding for the latest Vodafone transaction has not been outlined, but could come from short-term financing. Besides, another tranche of Rs 2,000 crore is to come in this September from its Abbott deal, he added In August 2011, when Piramal first picked up 5.5 per cent equity in Vodafone India for over Rs 2,800 crore, the Chairman, Mr Ajay Piramal, had said he expected returns of 17-20 per cent from the Vodafone investment, which would be higher than keeping the funds in a fixed deposit.

Flush with funds

Mr Piramal has, in the past, indicated that the investment horizon was 12-24 months, as Vodafone had indicated it would go in for an initial public offering in that time. If there is no IPO, the company could sell back its stake, he said, clarifying that he could sell to a third party too. He had also clarified then, that the deal did not require FIPB (Foreign Investment Promotion Board) approval, as it is between two Indian companies — Piramal Healthcare and ETHL Communications Holdings Ltd (Essar).

Piramal Healthcare was flush with funds after it sold its domestic formulations business for Rs 17,000 crore to Abbott, followed by the sale of its diagnostics business for over Rs 600 crore to Super Religare Laboratories — both in 2010.

After forking out Rs 2,500 crore for a buyback of shares, Rs 3000 crore towards the earlier Vodafone investment and another Rs 3,500 crore towards tax on the businesses it sold, at present, Piramal Healthcare, has about Rs 1,200 crore, a company official said.

The trigger for the latest transaction has not been outlined by the company, but Piramal Healthcare officials say Essar wanted to exit its stake. Nevertheless, the timing is impeccable, as Vodafone has since won its tax case against the Indian Government —  a development that had  cast a shadow of uncertainty on Piramal's investment in Vodafone India.

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