|Healthcare to telecom?|
|Friday, 12 August 2011 00:00|
Why would a healthcare major, even if it has cash coming out of its ears, want to invest $640 million for a 5.5% stake in a telecom company? It’s too small for any meaningful control in the company and, in any case, Piramal Healthcare has made it clear it plans to get out—when Vodafone lists or by selling the stake back to Vodafone. In his press conference, Ajay Piramal said the company is looking at annual returns of 17-20% on its investment, and he’s looking at getting out within 24 months. After Vodafone bought out Essar which had a 33% stake in the firm, the foreign stake in the firm crossed the 74% cap mandated by the law. So Vodafone needed an Indian partner, and the canny has Piramal stepped up.
If you need an example of just how mindless the 74% cap is and how it is aimed at only creating arbitrage opportunities for the chosen few, Vodafone is perhaps the best one to give. The cap was put in the belief that, if there was an Indian with a 26% stake in the firm, this would ensure the firm obeyed the law on security and other such issues. Why the government feels only Indians will obey its laws is another question, but with even a 33% stake in Vodafone, Essar’s Ruias always considered themselves to be financial investors and were not part of the day-to-day management. The insistence on needing Indian shareholders has created a bizarre situation in which the ‘value’ of Vodafone is yo-yoing dramatically. When Vodafone bought out Hutch in 2007, the firm was valued at $18 billion. When Essar decided to exit last month, the price paid by Vodafone put the firm’s value at $16 billion—this probably reflected the shape the telecom market was perceived to be in at that point, with revenues stagnating or falling. Today, with Piramal buying a 5.5% stake for $640 million, the company is worth $11.6 billion! The only thing that has brought the value down so much is that while market conditions aren’t good enough for Vodafone to list, it desperately needs an Indian partner with deep enough pockets to buy the stake. Yet another example of Indian policy that encourages arbitrage.