Vedanta bids to control Cairn India

Vedanta bids to control Cairn India

New Delhi/Mumbai: In what will rank among the largest deals involving an Indian company, Vedanta Resources Plc announced plans to enter the oil business by paying up to $9.6 billion (44,928 crore) for a majority stake in Cairn India Ltd, but the acquisition will have to overcome significant regulatory hurdles and a possible challenge from a partner of Cairn India, the state-run Oil and Natural Gas Corp. Ltd (ONGC).

The government has already indicated that the deal will require its go-ahead and ONGC said it would have to study the so-called right of refusal it has with Cairn India in the joint venture that runs the latter’s main oil asset in the country to understand its rights in the Vedanta-Cairn deal. However, Vedanta was confident of closing out the deal by the end of the current fiscal.

The change in ownership may also result in the exit of Malaysian oil and gas exploration firm Petroliam Nasional Bhd (Petronas), which holds a 14.9% stake in Cairn India.

On Monday, Edinburgh-based Cairn Energy Plc said it would sell between 40% and 51% of its stake in its Indian arm to the Anil Agarwal-promoted Vedanta at $8.66 per share (405).

Cairn is the operator in block RJ-ON-90/1, the firm’s main asset in India, while ONGC is the licensee and a partner in the field with a 30% stake.

R.S. Sharma, ONGC’s chairman and managing director, said that the company was “looking into" Cairn’s announcement to see if it had the “first right of refusal" in the event Cairn planned to sell a controlling stake in its Indian assets.

“This is an intricate transaction and we are examining this," he said.

Sharma declined to comment when quizzed about ONGC’s possible interest in Cairn’s Indian assets.

“How can Cairn sell its assets to a company, which has got no experience in exploration and production in the hydrocarbon sector?" said a senior petroleum ministry official, who did not want to be identified as the deal is still in the making.

Cairn Energy and Vedanta realize the challenges that face the deal. Cairn Energy’s chief executive Bill Gammell was to reach New Delhi late on Monday night and explain the transaction to the government on Tuesday.

“We will speak to all stakeholders and make them feel comfortable and emphasize that it is a win-win situation for all. All regulatory concerns would be looked at and we hope to get the full support of the government," said Gammell.

In a separate conference call with analysts, Vedanta’s management said that the company expected the deal to be completed by the first quarter of calendar year 2011.

“This is a unique investment which gives us the opportunity to create an India-focused natural resources champion that will cater to the energy needs of this growing economy," said one of the senior Vedanta officials on the call.

Those on the call included Agarwal, chairman; M.S. Mehta, chief executive officer; and Tarun Jain, director (finance).

Meanwhile, according to a person with direct knowledge of the development, Petronas is holding a review meeting in Kuala Lumpur on Tuesday to assess the situation and may even consider the option of exiting Cairn India. Petronas executives could not be reached for comment.

While Morgan Stanley advised Vedanta on the deal, NM Rothschild and Sons was Cairn’s investment banker.

The deal, once it is approved by the Indian government, will proceed in three stages. In the first stage, Cairn UK Holdings Ltd, a wholly owned subsidiary of Cairn, has agreed to sell a maximum of 51% (and a minimum of 40%) of the fully-diluted share capital of Cairn India to Vedanta. In the second stage, Vedanta will make an open offer of 20% at not less than 355 per share to other shareholders in Cairn India. Finally, subject to the result of the open offer, Cairn UK will offload up to another 11% of its holdings in the Indian subsidiary.

The UK firm currently holds a 62.36% stake in Cairn India, financial institutions 20.20% and individual shareholders, 2.50%.

The deal has a provision which will allow a stake sale between Cairn and Vedanta that will be triggered over the next three years through reciprocal arrangements of put and call options in July 2012 and July 2013, respectively. The options are designed to guarantee Vedanta at least 51% of Cairn India.

Vedanta has also taken measures to ensure that no rival can stake claim to Cairn India. Accordingly, Cairn UK has guaranteed Vedanta the first right to buy any equity sold by Cairn UK that could raise a potential rival’s holdings in the Indian unit above 20%.

The timing of the deal is significant for Vedanta as it lowers the cost of acquisition. The deal was concluded at a price of 405 per share, of which 50 goes towards non-compete fees paid to Cairn UK. Under existing guidelines, non-compete fees do not get added to the open offer price that Vedanta will have to pay.

Under India’s proposed takeover norms, non-compete fees will not be permitted. Therefore, everyone gets to sell their shares at the same price. The proposed takeover norms would have also required Vedanta to make a larger open offer had they been in force. As a result, the deal is cheaper for Vedanta today than it would have been had the proposed takeover norms been in place. The timing of the offer could save Vedanta as much as $9 billion, according to SMC Capitals Ltd.

The open offer by Sesa Goa Ltd, Vedanta’s subsidiary, will be financed by the Indian company’s own cash flows, Vedanta said during the analysts’ call. Vedanta’s Jain added that Sesa Goa had around $2.5 billion in cash.

Cairn India has run into problems with India’s directorate general of hydrocarbons, as reported by Mint on 27 March. Following the deal’s announcement, Cairn emphasized it would cooperate with the regulators to sort these out.

“We will always honour our obligations under the PSC (production sharing contract)," Manu Kapoor, director of corporate affairs at Cairn India, said in an email reply. “If, however, there are any disputes, we would discuss them with the government and other stakeholders and seek to secure an amicable resolution. We are currently paying cess under protest, the matter is now in arbitration and shall follow its own process."

In addition, Cairn has a pending dispute with ONGC on payment of royalty. Cairn has declined to share the royalty payments to the government which at present are being entirely absorbed by ONGC. Similarly, Cairn has challenged its cess dues and is paying these under protest.

Shares of Cairn India dropped 6.36% to close at 332.85 on Monday on the Bombay Stock Exchange. Sesa Goa declined 8.9% to end at 322.55. The exchange’s benchmark index, the Sensex, lost 0.64% to close at 18,050.78 points.