The acquisition of Cairn India by Vedanta failed to cheer the shareholders of the oil producer. The merger was completed on Tuesday.
Since the acquisition was first announced in August 2010, Cairn India shareholders have lost 7.17% of market value. This is despite the company’s share price doubling in the past one year on the back of stable crude oil prices.
As of Wednesday, the market value of Cairn India was Rs 58,000 crore.
When Vedanta announced the acquisition in 2010, crude oil prices were about $75 a barrel. Since then, oil prices fell 26% to about $55.62 a barrel on Wednesday. This has hit the Indian company hard.
Shareholders of Cairn India were also unhappy when the company gave a $1.25-billion loan in July 2014 at a low rate to Sesa Sterlite (now Vedanta), instead of distributing the cash among them as special dividend or buyback.
The BSE Oil and Gas Index gained 40% at the same time (see chart).
A Vedanta spokesperson said Cairn India was acquired for about Rs 300 per share. It was still in the same range. The company also paid out dividend for years. “This was despite oil prices falling by half,” the spokesperson said.
Vedanta and Cairn finally announced the merger on June 2015. The company said it would create a diversified metal- and oil-producing company.
The merged entity would have access to Rs 26,000 crore worth of cash and equivalents, which is currently on Cairn India’s books, according to a presentation made by it on February 9.
Analysts are of the opinion that the synergies of acquisition would take years to fructify.
“Falling oil prices also played an important role in shareholders not getting returns. There is anecdotal evidence that 70% of the M&As (mergers and acquisitions) fail to make money for small shareholders,” said Shriram Subramanian, founder and managing director, InGovern Research Services, a proxy advisory body.
Going forward, it might be even more difficult for Cairn India’s minority shareholders to make money from the combined entity, said analysts.
“Cairn India shareholders are exchanging a high-return, cash-rich and debt-free company for a low-return and debt-laden one,” said an analyst who did not want to named.
Cairn India’s return on net worth (equity) has been 15.9% on average in the past five years, much higher to Vedanta’s standalone 9.3% during the period. This includes the figures for erstwhile Sterlite Industries, which merged with Sesa Goa in 2013 to create Vedanta.
At the end of FY16, Vedanta (on standalone basis) had net debt of about Rs 37,000 crore and debt to equity ratio of around one. Vedanta standalone figures have been used to keep out the impact of Hindustan Zinc and Cairn India on its consolidated numbers.
Analysts also said Vedanta’s core metal and mining business is inherently volatile, with a few years of bumper profits followed by years of poor demand and sub-par profitability. In comparison, Cairn India’s oil and gas exploration business is relatively more stable.
For example, Vedanta (Sterlite Industries prior to FY13) reported return on capital employed (RoCE) in single digits in six out of past 10 years on a standalone basis. In contrast, Cairn India RoCE fell below 10% only once since it started full-scale production at its Rajasthan fields in 2011.
The trade-off is that Cairn India shareholders get access to relatively faster growing business because of Vedanta’s multiple revenue streams, including iron ore mining, copper, aluminium, zinc, power, and now, oil and gas.