Cairn Energy raises $928 million from Cairn India block

Cairn Energy yesterday raised Rs49.31 billion ($928 million) from the sale of an 8% stake in Cairn India — the second sell-down in its Indian oil and gas exploration and production unit in three months.

The sale was expected as Cairn Energy, which is Edinburgh-based but listed in London, obtained an approval from its shareholders to dispose of its entire remaining stake at the annual general meeting in May. And after a couple of strong days in mid-September the share price was also about 5.5% above where it was trading at the time of the previous transaction in late June, suggesting that a another sale could be imminent.

Cairn Energy was initially prevented from selling any more shares until Thursday this week, but Citi, which acted as the sole bookrunner both on the previous sale and this one, agreed to break the lock-up a few days early, which enabled the seller to make the most of the recent gains. The share price shot up to a six-month high on September 17 after the government announced a 14% increase in diesel prices as part of its efforts to reduce a bulging budget deficit, but has since eased back slightly.

Investors didn’t seem to mind and also appeared to welcome the fact that the deal size was a lot larger this time, which meant they were able to make a meaningful investment into the company. As Cairn India is not that liquid a stock — the deal accounted for about 60 days of trading based on the daily average in the past month — the sale should also have a positive impact on the daily turnover. Domestic funds in particular were keen on the deal and helped push the price to the mid-point of the range.

Cairn Energy will still own about 10.3% after this deal, and while that is likely to act as a bit of an overhang, those shares will be subject to another six-month lock-up, suggesting there could be some near-term respite for the share price.

Indeed, the stock held up well in the aftermath of the transaction, with the share price falling only 3.4% to a close of Rs333.75 yesterday — well above the placement price.

The deal launched shortly after the close of Indian trading on Monday and the order books were kept open to 9:30pm Hong Kong time. However, the price wasn’t announced until after the shares had been crossed on the Indian exchanges before the opening yesterday.

Cairn Energy offered to sell approximately 152.6 million shares at a price between Rs317.90 and Rs328.30, which translated into a discount of 5% to 8% versus Monday’s close of Rs345.55 on the National Stock Exchange.

As noted, the price was fixed at the mid-point, at Rs323.10, for a discount of 6.5%. The crossing of the shares yesterday morning was said to have gone well with the slippage at the final price being below 10%.

The price was above the Rs308.70 that Cairn Energy achieved three months ago, but the discount was slightly wider to compensate for the larger deal size. The previous sale amounted to $366 million and cleared at an average discount of 5.7% after being marketed at a 3% to 6.1% discount.

The 8% discount at the wide end this time helped attract hedge funds into the deal, and a source estimated that they took as much as 25% to 30% of the deal. However, the majority of the shares went to long-only investors, with domestic mutual funds taking about 60% and international long-only accounts about 10% to 15%. The number of international investors was still pretty good, but their order sizes were smaller, resulting in a very domestic-heavy order book. In all, about 70 investors participated in the transaction.

At $928 million, this is the largest block trade in India since Citi exited HDFC Bank through a $1.9 billion transaction in February. At the time of pricing, it was also the largest block trade in Asia ex-Japan this year outside the financial sector, although it was pushed down to second place after Temasek’s $1.04 billion sell-down in Singapore Telecommunications last night.

There have also been five larger deals in the financial sector: AIG’s two sell-downs in AIA, which raised $6 billion and $2 billion respectively; Goldman Sachs’s $2.5 billion sell-down in ICBC; Temasek’s concurrent sale of shares in Bank of China and China Construction Bank that amounted to $1.24 billion each; and Citi’s exit from HDFC Bank.

Cairn Energy said in a statement that it expects to raise net proceeds of about $910 million from the sale, which it will use to fund ongoing capital requirements.

“Cairn is delighted to have realised further value from its Rajasthan discoveries in India. In line with our stated strategy these proceeds will be used to deliver exploration-led growth and fund the development of discovered resources in the UK and Norwegian North Sea,” Cairn Energy’s CEO, Simon Thomson, said in a written statement. “We are now extremely well positioned both financially and operationally to deliver on our existing high quality portfolio of development and exploration projects.”

Cairn Energy made the decision to exit Cairn India after it sold 40% of the company in two tranches to Vedanta Resources last year for a total of $5.5 billion. Instead, it will focus on its main exploration assets in Greenland, the North Sea and the Mediterranean.

In addition to the shares they acquired from Cairn Energy, Vedanta and its subsidiary Sesa Goa also bought shares in Cairn India from Malaysia’s Petronas last year and made an open offer to minority shareholders. When the multi-legged acquisition closed in December 2011, the natural resources-focused Vedanta group owned a combined 58.5% of Cairn India.

Cairn India has interests in a total of 11 oil and gas blocks in India and Sri Lanka and is the largest private-sector crude oil producer in India.