Vedanta, Cairn set to merge

Each Cairn shareholder to get one Vedanta share plus a 7.5% redeemable preference share

Anil Agarwal-promoted Vedanta Ltd on Sunday said it would merge its subsidiary Cairn India with itself for a larger natural resource play. In the all-stock deal, each Cairn India shareholder would be offered an equity share of Vedanta Ltd, besides a 7.5 per cent redeemable preference share of Rs 10 face value.

While analysts said the merger would pave the way for Vedanta’s London-listed holding company, Vedanta Resources Plc, to lower its debt of close to Rs 76,000 crore, the company insisted the deal was aimed at creating a diversified natural resources company and simplifying the group structure.

 

The transaction implies a 7.3 per cent premium to the previous close on BSE — on Friday, the shares of Vedanta Ltd had ended two per cent lower at Rs 184 apiece and Cairn India shares 0.1 per cent lower at Rs 180.75 each.

In the merger, many see cash-rich Cairn India coming to the rescue of debt-laden Vedanta. As on March 31, 2015, Vedanta Ltd’s standalone debt (excluding subsidiaries’ liabilities) stood at Rs 37,636 crore. In contrast, Cairn India had cash reserves of close to Rs 17,000 crore, in addition to the profits it had been generating.

The deal, however, is subject to various regulatory approvals and is likely to close in the first quarter of the next calendar year.

“The merger of Cairn India and Vedanta marks a significant step towards achieving our long-term vision of a simplified group structure... and creation of long-term sustainable value,” said Vedanta Plc Chairman Anil Agarwal.

The company will now seek minority shareholders’ approval for the merger proposal. The UK-based Cairn Energy Plc, with a 9.8 per cent stake, is a minority shareholder in Cairn India.

Life Insurance Corporation of India (LIC), another of the largest institutional shareholders with a 9.1 per cent stake, might seek clarifications on the exact nature of the deal and how cash from Cairn India would be used to cut Vedanta’s debt. Company officials are expected to soon meet LIC to discuss the contours of the arrangement.

Explaining the rationale for the merger, Vedanta Chief Financial Officer D D Jalan said: “The merger is going to offer greater financial flexibility to shareholders of both companies and should not be seen as a move to deleverage Vedanta Plc’s balance sheet.” The company is going to formulate its own dividend policy to see that shareholders get healthy returns.

Last year, Cairn India had extended a $1.2-billion loan to Vedanta. This had been seen as raising uncertainty over utilisation of future cash flows, and criticised by shareholders of the oil company.

“The inter-company debt has been duly considered while arriving at the valuation of both Cairn and Vedanta and this is getting adequately reflected in the swap ratio,” said Jalan. “But upon consolidation, this inter-company transaction gets eliminated.”

After the merger, Vedanta Resources will have four subsidiaries, down from nine in 2011. The holding company owns a majority stake in Vedanta Ltd, which will issue shares for the all-share deal.

Analysts said Cairn India shareholders might be in for a raw deal. “If you consider the asset value of Cairn India, I think it is a raw deal for its shareholders. The company’s share price has declined lately, partly because of weak global crude oil prices. The share price also reflects that the merger buzz was perceived negatively by shareholders. So, the deal is a raw one for Cairn shareholders,” said Giriraj Daga, portfolio manager at SKS Capital End Research.

The merger had been in the works for some time. In April, the metals and mining conglomerate had changed its name to Vedanta from Sesa Sterlite to better align with Vedanta Resources, its international identity. Last month, Vedanta had also increased its stake in Cairn India by up to 5.33 per cent, moving a step closer to the planned merger.

Following the merger, the shareholding pattern will be such that Vedanta Plc’s ownership in Vedanta comes down to 50.1 per cent from 62.9 per cent at present. Cairn India’s minority shareholders will own a 20.2 per cent and Vedanta’s minority shareholders will own a 29.7 per cent stake in the enlarged entity.

The company management also said that Vedanta planned to go for a second stage of simplification but it did not give out any specific timeline. “Vedanta will consider further consolidation of some of its wholly owned foreign subsidiaries,” the statement said.

Meanwhile, Twin Star Mauritius Holding company, a Cairn India stakeholder and a 100 per cent Vedanta subsidiary that remains untouched in the consolidation announced on Sunday, will be merged into a foreign company. “The debt pending in Twin Star Mauritius Holding will be taken care of in the second stage of simplification,” said Jalan.