Sweetened merger deal: Cairn India rises, Vedanta falls


Mumbai: Shares of Cairn India Ltd on Monday opened on a positive note, while those of Vedanta Ltd slipped marginally, two days after the latter offered sweeter terms to shareholders of Cairn India to push through a merger that has been stuck due to opposition from minority investors such as Life Insurance Corporation of India (LIC).

At 9.16am, Cairn India was trading at Rs.193.25 apiece on the BSE, up 0.7% from its previous close, while India’s benchmark Sensex index fell 0.16% to 27,758.80 points. Vedanta Ltd, controlled by London-based, non-resident Indian businessman Anil Agarwal, fell 0.6% to Rs.168.

Despite a better deal, analysts believe that the merger is negative for Cairn India shareholders. The improved terms, though, may help the merger fructify.

LIC, which owns 9.06% in Cairn India and 3.9% in Vedanta, 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, but did not want to be named.

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 summoned a shareholders’ 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.

As of 31 March, 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.

As of 31 March, Vedanta’s net debt was lower at Rs.25,286 crore, reduced by Rs.6,254 crore during the year.

“We believe despite a better deal, the merger is negative for Cairn as Vedanta gets free access to Cairn’s $3.5 billion cash pile and write-off of $1.25 billion loan earlier extended by Cairn,” said Edelweiss Securities Ltd in its report dated 22 July.

“However, following the better terms, we believe the merger is less likely to fall apart. Cairn’s minority shareholders can sell their preference shares after 30 days of the merger’s conclusion,” added Edelweiss Securities Ltd.

On 22 July, Vedanta Ltd upped the offer to Cairn India shareholders: from one equity share and one redeemable preference share for each share held in Cairn India. The offer was revised to one equity share and four redeemable preference shares in Vedanta.

Also Read: Vedanta’s revised offer for Cairn seeks to hit sweet spot

On revised terms, the companies expect to close the merger by March 2017. On earlier terms, the merger was to close in June 2016.

“We don’t think minority shareholders such as LIC would be too happy with the deal. But there is a realistic possibility that the minority shareholders would accept the revised offer and would go for it. Beyond a point, they would prefer to close the chapter and move on,” said Pankaj Sharma, head of equities, Equirus Securities.

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

Anil Agarwal’s Vedanta Resources, in 2011, bought 58.5% in Cairn India from Cairn Energy Plc for $8.67 billion. Currently, Vedanta holds 59.88% in Cairn India.

“Now the ball is in the court of investors, including LIC. While Cairn shareholders would be happy, the same happiness will not be shared among Vedanta shareholders as they are shelling out more for the same business,” said J.N. Gupta, co-founder and managing director at Stakeholders Empowerment Services, a corporate governance research and advisory firm.

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

Gupta added, “It will be interesting to watch the behaviour of Cairn Plc especially in the context of ongoing and prolonged battle between the Union government and Cairn Plc.”

The merger plans hit a roadblock after the income-tax department froze Cairn Energy Plc’s 9.5% stake in Cairn India.

The tax department said the merger can happen only after the freeze is lifted and tax issues are addressed.

In January 2014, the tax department slapped a Rs.10,247 crore tax claim on Cairn Energy for alleged capital gains of Rs.24,503.50 crore made in 2006 while restructuring the business of Cairn India.

While Cairn India has approached Delhi high court, Cairn Energy is contesting the matter through an international arbitration.

In 2014, Cairn India Holdings Ltd had granted a loan of $1.25 billion to THL Zinc Ltd, a unit of Vedanta, for a period of two years. This loan was rolled over for another two years this May.

“I think the revised terms are better but looking at Cairn India’s growth prospects in the coming years, it is still a negative for Cairn shareholders. Cairn is cash rich and has good hydrocarbon reserves to be explored. Once crude oil prices go up, Cairn’s share price will improve,” said an analyst with a domestic brokerage, on the condition of anonymity as he is not allowed to speak to the media.