London-listed Vedanta Group will buy between 51% and 60% of Cairn India for $8.5 billion to $9.6 billion. Vedanta Resources and Sesa Goa will acquire Cairn India shares from Cairn Energy for Rs355 ($7.60) apiece. Vedanta will also pay Cairn Energy a non-compete of Rs50 per share.
Vedanta expects to ultimately own between 31% and 40% of Cairn India directly. Sesa Goa, a subsidiary of Vedanta and India’s largest private sector producer of iron ore, will hold up to 20%.
Cairn India has interests in 11 oil blocks in India and Sri Lanka. Its principal asset is a 70% stake in the Rajasthan oil development project, of which the first phase has been completed. The remaining 30% of that project is owned by the Oil and Natural Gas Corporation (ONGC), an Indian public sector firm. Currently, Cairn India produces approximately 125,000 barrels of crude oil daily, but Vedanta noted that it believes there is potential to more than double this.
Cairn Energy holds a 62.4% interest in the issued share capital of Cairn India. Cairn Energy was advised by Rothschild.
“The valuation is on the high side,” said Tarang Bhanushali, a metal analyst at Indian brokerage firm India Infoline. “We believe that Vedanta has some [inside] knowledge on Cairn's asset quality which is not known to the public,” he added.
Vedanta’s purchase from Cairn Energy triggers an open offer to minority shareholders of Cairn India, and Vedanta and Sesa Goa will jointly launch such an offer. Vedanta will reduce the number of shares it acquires from Cairn Energy based on the response to the open offer, subject to a floor of 40%, i.e. Vedanta has committed to buy at least 40% of Cairn India from Cairn Energy.
Alongside the non-compete fee that Vedanta will pay, Cairn Energy has agreed not to engage in the business of oil or gas extraction and/or transport or processing in India, Sri Lanka, Pakistan and Bhutan, or any other business which competes with the business of Cairn India and its subsidiaries, for a period of three years.
Cairn Energy is thus cashing out at a price of Rs405 per share. This represents a 21.8% premium to the closing price of Cairn India shares on India’s National Stock Exchange on August 11, the last trading day before rumours about a potential transaction began. It is a premium of 23.2% to the average closing price of Cairn India shares over the 30 calendar days ending August 11.
Minority shareholders will not be entitled to the non-compete fee thus will be offered Rs355 per share.
Vedanta’s outlay, including the non-compete fee, will range between $5.2 billion and $6.7 billion for between 31% and 40% of Cairn India. Sesa Goa, which will buy 20% of Cairn India through a combination of share purchases from Vedanta and shares acquired in the open offer, will have to pay around $3 billion depending on the response to the open offer.
Cairn Energy will continue to own a residual interest in Cairn India of between 10.6% and 21.6% depending on the number of Cairn India shares tendered in the open offer. Vedanta has negotiated pre-emptive rights to buy these shares under certain conditions.
Vedanta will fund the deal through debt and cash resources. Given the size of the deal and the quantum of funding Vedanta is expected to raise, a host of banks have been appointed to work with the London-listed firm. Standard Chartered has emerged as first among equals, as lead financing bank and joint lead financial adviser. J.P. Morgan Cazenove and Morgan Stanley are joint lead financial advisers. Credit Suisse and Goldman Sachs are joint financing banks and joint financial advisers.
“The deal will put pressure on Vedanta's balance sheet as complete funding of the deal at the Vedanta level will be through debt,” said Bhanushali. “Vedanta's standalone debt will jump sharply on account of this and will require higher dividends from Sterlite and Sesa Goa for future cash flows on account of capex [capital expenditure] announced and interest outflow."
Sesa Goa will fund its investment primarily from existing cash balances. Bhanushali does not expect the deal to have much of an impact on Sesa Goa’s balance sheet as the Goa-based company is cash rich.
The deal still requires customary approvals, as well as special approval from the government of India, given that it concerns an oil field in which ONGC has a stake.
Vedanta is a producer of aluminium, copper, zinc, lead, iron ore and commercial energy with its primary operations in India and some businesses in Zambia and Australia. The deal represents a diversification for the metals and mining company. "The proposed acquisition significantly enhances Vedanta's position as a natural resources champion in India,” said Anil Agarwal, executive chairman of Vedanta in a written statement.
“Diversification by the company is somewhat negative for minority shareholders as they have invested in Vedanta in the past on account of its exposure to metals,” commented Bhanushali. “However, the diversification into oil and gas can be a strategic investment in the company's portfolio considering the rising demand for oil globally. In the long term the deal will be positive on account of the tight [oil] situation and the rising demand from emerging markets.”
