Cairn shareholders get sweeter Vedanta deal terms

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Mumbai: Vedanta Ltd, controlled by London-based non-resident Indian businessman Anil Agarwal, on Friday offered sweeter terms to shareholders of Cairn India Ltd to push through a merger that has been stuck due to opposition from minority investors such as Life Insurance Corporation of India (LIC).

For each share they hold, Cairn India minority shareholders will receive one equity share and four redeemable preference shares in Vedanta, under the revised terms outlined by the mining and metals company.

That’s a steep improvement over the previous offer, made on 14 June 2015, of one equity share and one redeemable preference share for each share held in the oil and gas exploration company.

The preference shares that will be issued would have a tenor of 18 months and a coupon of 7.5%, but investors have the option of redeeming the shares in 30 days, Vedanta said.

On Friday, Vedanta shares rose 7.44% to Rs.168.95 and Cairn India shares gained 8.72% to Rs.192 on a day the BSE’s benchmark Sensex gained 0.33% to 27,803.24 points.

The sweeter terms may persuade minority shareholders to reconsider the merger, which would give Vedanta access to Cairn India’s large cash pile. LIC, which has a 9.06% stake in Cairn India and 3.9% holding in Vedanta, has expressed concerns over the terms of the previous offer, and the debt that a combined entity would inherit.

India’s largest insurer said it will examine the revised terms and other parameters.

“The revised terms are definitely better than the earlier terms. But LIC will examine if they are sufficient for LIC to vote in favour of the merger,” said a person close to the state-owned insurer.

“The revised terms have come after more than a year of the original proposal. The stock prices have changed now, the financials of the two firms have changed now and these things change the arithmetic,” the person said.

“Earlier, the investors were getting Rs.10 through redeemable shares and now they will get Rs.30 more in redeemable shares, but these shares cannot be traded and even the coupon offered on these shares is just as good as G-Secs. So, the revised terms have to be examined carefully by LIC’s internal departments and the board-level committee,” the person added.

Brent crude dropped 27.21% from $68.29 a barrel to $49.71 a barrel in the year to June 2016. In the same period, Cairn’s share price has increased by 6.22% and Vedanta’s share price dropped 8.18%.

LIC will also consider factors such as the merged entity’s growth prospects, its exploration licences and the pending legal issues the two companies are facing.

“Vedanta has a court decision pending and Cairn, too, is contesting a case over withholding tax to the government. Besides, Cairn’s exploration licence is expiring in 2020, following which the company may or may not get an approval to be in the oil exploration business. Additionally, Cairn’s business is not well-diversified. So, LIC has to see what are the growth prospects of the company and how the pending cases are dealt with by the promoters,” added the person close to LIC.

Vedanta has summoned a shareholder meeting to consider the new offer on 8 September. Cairn shareholders will convene on 12 September. Following this, a high court-convened meeting will take place on 16 September. LIC is likely to communicate its decision on the merger in the second week of September.

Some analysts say the new terms may still not be enough to convince Cairn shareholders, given that the stock is undervalued in the first place.

“I think Cairn India is still undervalued. Cairn’s cash and the loan of $1.25 billion to THL Zinc Ltd, a unit of Vedanta, for a period of two years should be valued at Rs.170 per share. In addition to that, the operations and stable performance of Cairn needs to be considered. Cairn has a lot of potential upside. Operations should have been valued at Rs.100 per share at least. This makes it Rs.270 per share against the present Rs.192 per share,” said an analyst with a domestic securities house, on condition of anonymity as he is not authorized to speak to the media.

Vedanta said an improvement in commodity prices and its engagement with shareholders has caused it to amend the terms of the deal.

The new offer came a day after Cairn India chairman Navin Agarwal said his company expected the merger to be completed by the end of March. The company had earlier targeted completion of the merger by June 2016.

If this deal goes through, Cairn India minority shareholders will own 20.2% in the merged entity and Vedanta’s minority shareholders 29.7%.

“The strategic rationale for merging Vedanta Limited and Cairn India remains highly compelling. Diversified resources companies have delivered superior returns for shareholders historically,” said Tom Albanese, CEO of Vedanta Ltd.

“The transaction consolidates our portfolio of attractive Tier-I assets and simplifies the group structure, better positioning the group to deliver superior value to all shareholders over the longer term,” he added.

As of 31 March, 2016 Cairn’s closing cash and cash equivalent position was at Rs.19,521 crore, of which 69% was invested in rupee funds and 31% in dollar funds.

“Stronger balance sheet lowers overall cost of capital and consistent with stated corporate strategy to simplify the Group structure,” Vedanta said in a presentation on its website.

As of 31 March, net debt at the company was lower at Rs.25,286 crore, cut by Rs.6,254 crore during the year.

“On a standalone basis, Cairn is a much more valuable company perhaps when you look at it in totality and see the company’s potential and the business opportunity which lies ahead of it,” said Pankaj Sharma, head of equities at Equirus Securities.

“If we have to put it a little differently, at a broader level, the ownership structure has been one of the reasons why investors were sceptical about Cairn for some time and the latest development doesn’t seem like an outcome which would prove that those concerns were entirely unjustified,” added Sharma.