Falling aluminium prices could add to uncertainty around Cairn-Vedanta merger
Mumbai: Falling aluminium prices could add to the uncertainty around the proposed merger of mining and minerals company Vedanta Ltd and its oil and gas arm Cairn India Ltd, as the share price of Vedanta slips, making the share-swap ratio seem unfavourable for Cairn shareholders.
Vedanta Aluminium, the company’s aluminium division, is contemplating a massive reduction in headcount and other austerity measures to weather the impact of falling benchmark prices of aluminium on the London Metal Exchange (LME), Reuters reported.
“If at any point of time any further debacle happens, (like the) LME crashes down further, obviously the domestic aluminium producers will have no room to operate,” Abhijit Pati, chief executive officer of Vedanta Aluminium, told Reuters on Tuesday. “We have already started making austerity drives, but that will not suffice. We are going into a huge amount of headcount reduction.”
Aluminium prices on the LME are at a six-year low of $1,660 per tonne, having fallen steeply from $2,555 per tonne three years ago.
Analysts said the aluminium business contributes up to 12% of the operating profit at Vedanta Ltd and could impact overall profitability and the share price. Vedanta has two main aluminium divisions: Balco Ltd, which has an installed aluminium smelter (production) capacity of 325,000 tonnes per annum (tpa) and the Jharsuguda smelter under Vedanta Aluminium that has an installed capacity of 1.25 million tonnes per annum (mtpa).
On 15 June, the day after the merger was announced, shares of Cairn India were trading at Rs.187.60, while shares of Vedanta were trading at Rs.181.25. Since then, however, there has been a divergence in the stock price performance of the two companies, with Vedanta’s shares falling by 25%, while Cairn’s shares shed 12.5%.
On Wednesday, shares of Vedanta Ltd lost 0.37% to close at Rs.136.10 in Mumbai trading, while the Cairn India scrip rose 2.58% to Rs.166.95. The benchmark Sensex rose 1.15% to close at 28,504.93 points.
A steeper fall in the share price of Vedanta compared with Cairn India could make the share-swap ratio for the proposed merger look unattractive for Cairn shareholders.
“Usually, a 1:1 swap ratio means that the two companies (Vedanta and Cairn India) should be at more or less the same price, or the entity being merged should be at a discount. That is when it is easy to sell a merger to the shareholders. But in case of Vedanta, it is completely opposite,” said an executive at a financial advisory firm, adding that this could bring the share swap ratio into question. He requested anonymity.
As per the terms of the merger, for each stock held, shareholders of Cairn India will get one ordinary share and minority shareholders will receive an additional 7.5% redeemable preference share of Vedanta Ltd, which can be redeemed at the face value of Rs.10 at the end of 18 months. The transaction represents a 7.3% premium to Cairn India’s 12 June closing stock price, the firm said at the time of the transaction.
Some minority shareholders have already expressed concerns.
On the sidelines of the Cairn India annual general meeting held in Mumbai on Tuesday, a representative of United India Insurance Co. Ltd said the company opposes the merger and arrangement between Cairn India and Vedanta. He declined to be identified.
United India Insurance holds less than 1% stake in Cairn India. However, recent reports have suggested other shareholders may have reservations about the proposed deal as well. On 6 July, CNBC-TV18 news channel reported that Life Insurance Corp. of India (LIC) wants a better share-swap ratio for minority shareholders. LIC and UK-based Cairn Energy Plc. are the largest minority shareholders in Cairn India and hold a little less than 10% each.