BackThe analysts’ opinion on Cairn-Vedanta merger
Analysts give a thumbs down to the deal for Cairn shareholders but call it an opportunity for Vedanta's
Premium
A day after Vedanta Ltd and Cairn India Ltd announced their merger, most analysts gave the thumbs-down to the deal for Cairn India shareholders, but called it a good opportunity for the shareholders of Vedanta.
Here is what some brokerages and proxy advisory firms said.
CLSA Ltd
— Approval from government due to court cases and minority shareholders because of unattractive valuations may prove a hurdle for this merger. While a rejection of merger may drive 40-50% upmove in Cairn’s stock, which is building in $50 Brent, merger completion may limit downsides in merged entity’s stock.
— While the merger may limit downsides in Vedanta’s stock, we see a huge, approximately 40%, upside based on our target of Cairn, if merger is disapproved as this will remove overhang of value leakage to majority.
— Raw deal for Cairn India’s shareholders.
— The proposed merger of Cairn India into Vedanta is a positive for Vedanta as it would result in better cash fungibility and drive a meaningful improvement in standalone balance sheet while being EPS (earnings per share) neutral.
Kotak Securities Ltd
— The merger will improve the capital structure at Vedanta by providing access to Cairn’s cash reserves and rich cash flows.
— Vedanta’s improving capital structure, strong volume growth and strong pricing outlook on zinc make us iterate our “Buy" rating and target price of ₹ 235.
— The merger will result in a write-off of goodwill related to the Cairn acquisition.
— This will result in a 7% to 22% increase in FY2016-18E earnings per share due to a decline in the goodwill amortization charge.
— On assuming Cairn merger, the net debt at standalone level (and wholly-owned subsidiaries) will decline to ₹ 611 billion/ ₹ 578 billion for FY2016/17E compared to ₹ 845 billion/ ₹ 827 billion in a premerger scenario.
— We believe the merger can facilitate loan repayment by Twin Star Mauritius Holdings Ltd to Vedanta Resources Plc, thereby easing the high leverage at the parent entity.
— The proposed transaction implies a value of ₹ 55/share for a 70% stake in Rajasthan block—discount to intrinsic value, in our view. We suspend our rating and target price as we expect Cairn India stock to trade at merger-parity with Vedanta Ltd.
UBS AG
— Merger ratio unlikely to excite minorities; their approval stays critical.
— However, the merger ratio is below our expectations; while additional 7.5% redeemable preference share provides some marginal benefit of approximately $135 million (i.e. ₹ 11/share for minorities), we don’t think this is sufficient to offset Cairn’s cash (about $2.7 billion) which gets diluted upon merger.
— With a majority of the Cairn minority shareholders (holding 40% equity) required to approve this merger, we think there is a risk of institutional investors’ delaying the process, which could impact sentiment.
Axis Capital Ltd
— We expect Vedanta to rerate as the Cairn merger provides immense financial flexibility due to access to Cairn’s $2.7 billion cash reserves and annual Ebitda (earnings before interest, taxes, depreciation, and amortization) of approximately $1 billion.
— Merger will also unfold the true potential of Cairn, which always had a valuation overhang due to an impending amalgamation with the parent.
— Cairn shareholders will also gain from the diversified earnings stream and rerating of the Vedanta stock.
— We now value Cairn India at ₹ 250/share (vs ₹ 220/share earlier) as we give 100% value to cash vs 75% earlier and 1% lower discount rate as overhang of merger with Vedanta is behind.
InGovern Research Services Pvt. Ltd
n Cairn India is a debt-free firm. As a result of this merger, public shareholders of Cairn will become shareholders of the heavily levered Vedanta Ltd.
n The merger will socialize the debt of Vedanta Ltd across the minority shareholders of both Vedanta and Cairn India.
— With the merger, shareholders of Cairn India are essentially paying for the acquisition debt of Cairn India.
Stakeholders Empowerment Services
— The merger is “unfair" for the shareholders of Cairn India, as the current share price of the company does not reflect the inherent value of the company.
— The price of Cairn India is down, it has a huge cash reserve and the shareholders are getting unnecessary diversification into an array of commodities, which they might not be interested in.
— With the fall in commodity prices, Vedanta Ltd and Cairn India have seen their share prices fall, but Cairn India has a better chance of a bounce-back to proper valuations, considering it has exposure to a single commodity.
Institutional Investor Advisory Services
— The deal is fair for shareholders of both the companies—Vedanta Ltd and Cairn India Ltd.
— The increased balance sheet size due to the merger will lead to greater financial flexibility and the improved financial strength will provide an additional buffer to absorb the impact of contingent liabilities.
— Cairn India shareholders get access to low-cost, longer-life assets and a diversified product portfolio, which can help the company ride the cyclical downturn of oil prices and lead to stable cash flows.
Unlock a world of Benefits! From insightful newsletters to real-time stock tracking, breaking news and a personalized newsfeed – it's all here, just a click away! Login Now!
