Vedanta Ltd’s decision to sweeten its offer to clinch the merger of Cairn India Ltd with itself is no surprise. The question is if the revised number—one equity share plus four preference shares of Rs.10 each instead of the originally proposed one preference share of Rs.10—will pass muster.
Although the revised terms were announced post-market close on Friday, both shares had risen sharply on Friday. Taking Thursday’s prices then, Cairn’s price was Rs.20 higher than Vedanta’s. The additional preference share amount of Rs.30 in effect covers this gap and also leaves Rs.10 on the table as a sweetener. This assumes the original price of Rs.10 was already factored in Cairn’s price.
This offer is better than the earlier one, but only if you think a merger was required to begin with. Some Cairn shareholders may not. After all, it was doing fine as a standalone entity before Vedanta acquired it. The rationale for the merger proposal was driven partly by Vedanta group’s desire to simplify its holdings. Another is to get access to Cairn’s cash. If the group’s debt was less dizzying, one wonders if it would have pushed for a merger.
After all, post-merger, Vedanta Resources’ 62.9% stake in Vedanta Ltd—which, in turn, owns 59.9% in Cairn—will decline to 50.1%. And Vedanta already consolidates Cairn’s financials with itself; so the financial gain is not much.
Sure, it will not have to attribute Cairn’s profits to minority any more. Under consolidation, initially all of Cairn’s profits are included in Vedanta’s profit after tax, but the share of Cairn’s profit attributable to its minority shareholders is deducted to arrive at the net profit after minority interests. As an example, if Cairn had been a division of Vedanta in FY16 itself, Vedanta’s profit would have been 6% higher, according to a presentation.
The contrasting debt positions of the various entities in the group is another reason for the merger. Vedanta’s standalone net debt (debt minus cash and equivalents) is Rs.41,107 crore as of 31 March, up from Rs.36,796 crore a year ago.
Twin Star Mauritius Holdings and other subsidiaries account for Rs.22,279 crore of net debt. But Vedanta’s consolidated net debt is only Rs.25,286 crore. Cairn India is one main reason, with Rs.19,779 crore in net cash, while Hindustan Zinc Ltd is another with Rs.30,798 crore in net cash.
A merger means Cairn’s cash will move into Vedanta’s bank account, instead of the current situation of an arm’s length relationship between parent and subsidiary. Recently, Cairn had rolled over a two-year loan of $1.25 billion given by its overseas subsidiary to Vedanta’s overseas subsidiary, due in May 2016. Analysts expect this loan may get cancelled, post-merger. Cairn’s investors had been unhappy when this loan was given.
Assuming Vedanta has informally sounded out large entities in its list of minority shareholders before revising the terms, the merger could pass muster. Cairn’s investors have to now choose if they want to be part of a commodity conglomerate. If not, they can use the run-up in prices to exit.