Mumbai: Vedanta Resources Plc merged its two Indian units—Vedanta Ltd and Cairn India Ltd—in a move that will unlock about $2.6 billion in cash for the debt-laden parent.

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 10 at the end of 18 months. The transaction represents a 7.3% premium to Cairn India’s Friday’s closing stock price and is expected to be completed by the end of March, according to a joint statement issued by Vedanta and Cairn India on Sunday.

The merger makes it easier for Vedanta group, and its Indian holding company Vedanta Ltd, to access Cairn India’s cash reserves. Mint reported on 10 June that the key reason for merging Cairn India with Vedanta Ltd is its cash reserves. Cairn India had cash and cash equivalent of 16,867 crore as on 31 March. In contrast, Vedanta Ltd, which holds majority stakes in Hindustan Zinc Ltd, Balco Ltd and Vedanta Aluminium Ltd, is saddled with a debt of 37,636 crore.

“The deal is being done for the convenience of the group and not for the shareholders. From an exposure to a company which thrives on pure crude oil cycle, investors are now exposed to a blended natural resources company with a baggage of huge debt," said independent analyst S.P. Tulsian.

The all-stock transaction may, however, face a potential hurdle because of a 20,000 crore tax demand pending on Cairn India by the income-tax department.

The combination of the two Indian entities will, in fact, benefit Cairn India’s minority shareholders, said Tom Albanese, chief executive officer of parent Vedanta Resources.

The merger will deliver $1.3 billion in marketing and procurement benefits over the next four years and Cairn India’s minority shareholders will get access to the total savings, he said in an interview on Sunday.

The merger, once completed, will also simplify Vedanta group’s complex structure.

“The deal is not being done to access the cash of Cairn India but to simplify the group structure and de-risk the holdings of the shareholder from a single commodity to a diversified asset portfolio," said D.D. Jalan, whole-time director and chief financial officer of Vedanta Ltd. “Vedanta Ltd, per se, is not a highly leveraged company and it has regular cash flows to meet its fund requirements."

Globally, it is seen that diversified companies always give higher returns than a company with a single commodity exposure, he said.

Jalan said that considering the redeemable preference shares, the effective swap ratio post the merger will be at 1:1.04 while the net debt-to-equity ratio will be at 1.4 for the consolidated Vedanta Ltd.

Still, the merger may face opposition from investors and analysts. Last July, Vedanta Ltd spooked investors when the company said it had taken a loan of $1.25 billion (around 7,900 crore) from Cairn India to pare down the debt of an unlisted subsidiary.

Currently, Cairn India contributes close to 28% to the overall operating profit of Vedanta Ltd while the cash-rich Hindustan Zinc and Zinc International together contribute 44%. The money-losing aluminium unit accounts for a mere 14% of the overall operating profit.

Investors are upset with the merger, said an analyst with an international brokerage. He declined to be named, citing company policy.

“Low crude oil prices are the time for an operationally low-cost company such as Cairn India to stand out. Firstly, there was no need to go for an aggressive capex cut (announced in April), then writing down its Sri Lankan exploration exposure and now the merger," the analyst said. “This is the time when Cairn India should use the cash to purchase cheaper assets globally and not use it for the benefit of the promoters."

Cairn India will continue to retain its brand and invest in the Rajasthan oil and gas block, said CEO Mayank Ashar. “The merger de-risks our exposure and gives us significant economies of scale and access to enhanced liquidity," he said.

After the completion of the merger, parent Vedanta Resources’ ownership in Vedanta Ltd is expected to drop to 50.1% from its current 62.9% while Cairn India’s minority shareholders will own 20.2% and Vedanta Ltd’s minority shareholders will own a 29.7% stake in the combined entity.

The erstwhile parent of Cairn India—Cairn Energy Plc and Life Insurance Corporation of India (LIC)—are the biggest minority shareholders of Cairn India with a holding of a little below 10%. The two together will have a say in the merger approval.

“We do not expect any objections as the deal has to be approved by a majority of minority investors," said Jalan. However, an approval from the income-tax authorities will also be needed, he said.

A senior tax consultant said this could be the major hurdle for the company as both Cairn India and its erstwhile parent Cairn Energy are facing a tax demand of 20,000 crore and 10,000 crore, respectively.

The two companies were issued separate tax notices in March for failure to pay capital gains tax when some assets of Cairn Energy were transferred to Cairn India. The matter is currently in court.

According to the company statement, post the merger, Vedanta Ltd will continue to be publicly traded on BSE and NSE, with its American Depositary Shares listed on the New York Stock Exchange. Cairn India’s BSE and NSE listings will be cancelled following completion of the reverse merger.

Albanese said this transaction consolidates Vedanta’s portfolio of tier-1 assets which, combined with strong management, will deliver superior returns for all shareholders. “It will result in improved financial flexibility to allocate capital to the highest return projects and sustain strong dividends. The combined entity is uniquely positioned to help unlock India’s wealth of world-class energy and mineral resources," he said.

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