Petronas exits Cairn India through $2.1 billion block trade

Petronas International Corp, a wholly owned subsidiary of Malaysian state-owned oil and gas producer Petronas, yesterday sold its entire 14.9% stake in Cairn India through an accelerated placement that ranks as the largest ever overnight block trade out of India. At the final price, Petronas raised Rs93.82 billion ($2.1 billion).

The sale came after Vedanta Group and its subsidiary Sesa Goa kicked off an open offer to Cairn India’s minority shareholders on April 11 as part of a plan by the group to acquire a majority stake in the oil producer. The acquisition represents a significant diversification for the group. London-listed Vedanta is a producer of aluminium, copper, zinc, lead, iron ore and commercial energy with its primary operations in India, while Sesa Goa is India’s largest private sector producer of iron ore.

The acquisition, which was agreed in August last year and will see Vedanta and Sesa Goa jointly buy between 51% and 60% of Cairn India from Cairn Energy and minority shareholders, had left Petronas unsure about its role in the company and it had been speculated that it would sell its holdings. Petronas has been an investor in Cairn since before its initial public offering in 2006.

The block trade was large not just in dollar terms, but in relation to the daily trading volumes as well. In fact, the deal size accounted for no less than 106 trading days, according to a banker, which could well be another record.

However, the thin liquidity in the stock wasn’t reflected in the price with the stock offered to investors at a discount of 0.04% to 3.3% versus Monday’s close on the National Stock Exchange of India. A source said this was possible since the share price has not performed in line with the rise in oil prices over the past six months, mostly due to the ongoing M&A transaction. That has left the stock at an attractive valuation and most analysts and investors don’t see much downside from current levels. According to the source, analysts put the fair value of the company, which is the only direct play on crude oil in India, at about Rs410 to Rs440 per share.

On top of that, hedge funds were interested in the transaction as a means to arbitrage the ongoing open offer, which will close on April 30. Of the total demand, about 60% came from hedge funds.

That calculation doesn’t take into account that 74% of the deal, corresponding to an 11% stake in the company, was bought by Sesa Goa. The block would have been attractive for the firm since it came at a 6.8% discount to the open offer, which is priced at Rs355 per share, hence reducing the cost of the overall acquisition somewhat. Its participation obviously helped ease the pressure on the bookrunners in terms of getting the deal done, and led to complaints by rival bankers that a large part of the deal wasn’t really a block trade at all, but rather should be seen as part of the open offer to minority shareholders.

However, a source close to the offering said Sesa Goa had submitted an order for shares just like everybody else and that there had been no pre-arranged agreement with the buyer. Still, it meant that only about $546 million was allocated to other investors.

The deal comprised approximately 283.4 million shares, which were offered to investors at a price between Rs325 and Rs336 apiece. The price was fixed just above the mid-point for a 1.5% discount versus Monday’s close of Rs336.15.

About 50 investors participated in the transaction, which was not a bad tally given that the deal didn’t launch until 2am India time on Tuesday morning and closed at 8am. This would have limited the number of international investors that had a chance to look at the deal.

However, the stock traded well in the secondary market yesterday, suggesting that investors liked the transaction and perhaps were also pleased that the potential overhang caused by Petronas’s stake has been removed. At the end of yesterday’s trading, the share price had added 2.4% to Rs344.10.

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 has said it believes there is potential to more than double this.

The deal was arranged by Bank of America Merrill Lynch on a sole basis – a rarity on Indian equity deals in general and particularly for a transaction of this size. The offering is bound to give the US bank a push up the league tables, both in India and in Asia ex-Japan, although it was unclear last night whether it would get full credit for the portion bought by Sesa Goa.

This story first ran on our website on April 20.