Mumbai: Shares in Vedanta Resources and Cairn Energy climbed on Tuesday after analysts said moves to increase the miner’s stake in Cairn’s Indian assets and to cut the price of a long-pending deal signalled the two were edging closer to a solution.
Cairn Energy agreed last August to sell a majority stake in Cairn India to Vedanta in a deal that was valued at up to $9.6 billion. But the sale, which would be one of the largest in India’s energy sector, has been delayed due to a disagreement over royalty payments.
Oil ministry has been pushing for Cairn India to share royalty payments with state-run Oil and Natural Gas Corp (ONGC), which has a 30% holding in the Cairn-operated Rajasthan Block but pays 100% of the royalties.
“The Indian government, Vedanta and Cairn appear to be getting closer and closer to some sort of agreement,” Charles Cooper at Oriel Securities in London said on Tuesday.
Analysts said changes to the deal -- and in particular a decision to remove a non-compete fee that cuts the price of a 40% stake in Cairn India by more than $600 million -- indicated Vedanta and Cairn were closer to agreeing to India’s demand that royalty payments be shared.
“In particular, we believe they signal that Vedanta is willing to accept new, expected government conditions, which removes an important roadblock that has so far prevented Cairn from realising the value of Cairn India,” Morgan Stanley analysts said in a note.
Shares in Vedanta and Cairn climbed over 2% in early trade on Tuesday, outperforming the market. Vedanta was up 2% at 1,943 pence at 1115 GMT, while Cairn was up 1.7%, against a 0.4% rise in the FTSE index.
Vedanta said its increased stake in Cairn India indicated its commitment to the deal, but the larger share also provides protection in what could be a long process.
By taking its stake over 20%, Vedanta can now include its equity stake in Cairn India in its accounts, even if it has to wait to obtain the remaining 30% -- potentially fighting any royalty decision through the courts.
“The fact that Vedanta will have nearly a third of Cairn India after buying 10% more by next month, they won’t be desperate for the government’s approval for the remaining 30% stake to take controlling stake,” said Jagannadham Thunuguntla, head of research at SMC Global in New Delhi.
Vedanta already has an 18.5% stake in Cairn India from an open offer and from Malaysia’s Petronas . It will increase that to 28.5% by 11 July.
Cairn India shares down
Shares in Cairn India, however, have fallen nearly 13% since the announcement of the deal. The stock slipped over 2% on Tuesday, as investors worried about loss of revenue due to royalty payments.
Goldman Sachs said the lack of clarity over the issue of royalty payments would remain an overhang for the stock, while the lack of a clear parent company would also weigh.
The government has given no timetable for its decision on the deal. A ministerial panel has referred it back to the cabinet with a recommendation, but that recommendation has not been made public.
A government source told Reuters the panel would recommend the operators of Cairn Energy’s key oil field share the royalty burden in proportion to their stake in the project.
The cabinet has been expected to meet to decide on the deal, but the meeting has been delayed over the past few weeks.
“They (Cairn, Vedanta) must be aware of the outcomes being discussed by the group of ministers, and are trying to be proactive,” said Deepak Pareek, oil & gas analyst at brokerage Prabhudas Lilladher.
Analysts have estimated the impact of royalty-sharing at Rs65 to 70 a share, but crude oil prices have moved up since the deal was signed last August.
On the Cairn Energy side, analysts said the removal of the non-compete clause would mean a reduction of only just over 5% in post-tax proceeds -- a small price to pay for cash upfront which will help fund its exploration needs.