London: India-focused Vedanta Resources is in talks to buy a stake in Cairn India that would be the diversified miner’s first move into oil and gas.
Vedanta and British oil and gas company Cairn Energy, which has a 62.37% interest in Bombay-listed Cairn India, confirmed on Thursday they were in talks.
Cairn India was valued at $13.6 billion at the close of trading on Wednesday, valuing Cairn Energy’s stake at $8.5 billion.
“A move into oil would be a very strange shift away from Vedanta’s core business of developing mines and smelters,” analysts at Credit Suisse wrote ahead of confirmation from the companies. “We therefore struggle to see any strategic fit or synergies.”
BHP Billiton is the only large mining company to have a significant interest in oil.
Cairn Energy shares were up 2% at 1155 GMT, while shares in Vedanta were down 4.6% as analysts questioned its ability to afford another big acquisition.
“Funding would be a big issue,” Credit Suisse, which is already predicting capital expenditure for Vedanta of $10 billion over the next three years, said. “We therefore see limited room for additional debt funding.”
Richard Rose, analyst at Oriel Securities, said Vedanta buying 12% of Cairn India would allow Cairn to retain a controlling interest whilst raising about £1 billion for exploration opportunities. Rose said he Cairn Energy would likely be happy to reduce its stake in such a way.
Key risks in any deal would likely include concerns over any cash requirement given what Rose described as Vedanta’s “relatively stretched” balance sheet.