Contours likely to be finalised by Monday; markets concerned at debt load.
As talks between Cairn Energy and Anil Agarwal’s Vedanta Resources reach an advanced stage, investment banking sources told Business Standard the latter had already tied up close to $4 billion (Rs 19,000 crore) of funding from three leading banks.
Goldman Sachs, Barclays and JPMorgan have agreed to finance the deal via a combination of dollar and pound debt, said people close to the ongoing negotiations. The final deal size is not yet known, but Vedanta already has a commitment from these banks. Others may join, depending on the final deal value.
Over the weekend, the contours of the deal are expected to be put in place by Vedanta’s core team of Agarwal himself, Sterlite finance director Tarun Jain and Vedanta CEO M S Mehta, along with Cairn Plc’s CEO, Bill Gammell, and his senior management team. “There is no concrete offer on the table yet, but it’s work in progress and something can happen overnight. It’s very clear Vedanta will take a strategic stake. So, it can be anything between 25-51 per cent,” said a person privy to the ongoing talks.
Vedanta officials, however, insist they would like majority control or at least a controlling stake. Cairn, too, wants to focus on exploration rather than operating a producing field. The money is expected to be reinvested in Cairn’s E&P assets in the Arctic region.
It is expected that even if Vedanta takes a 51 per cent stake, the deal will so structured that the final stake will be inclusive of the open offer. At the current market value of Cairn, Rs 67,443 crore, acquisition of a majority stake is expected to cost Vedanta Rs 34,400 crore. Experts say it will have to give a premium over the current price for gaining control – the market is abuzz with speculation that the deal will happen at around Rs400 per share.
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Sources say work is also on to explore how the exemptions under the Takeover Code can be exercised, so that the open offer trigger doesn’t get exercised even if the stake actually crosses the 15 per cent threshold.
Financing
While the deal modalities are yet to be announced officially, the Vedanta group had net cash and cash equivalents of $7.2 billion (Rs 33,120 crore) as on this March, of which $3.13 billion (Rs 14,380 crore) was in the books of Sterlite Industries and $1.09 billion in Sesa Goa (another India-listed subsidiary). In case of Sterlite, the company had cash and investments worth Rs 23,642 crore and debt of Rs 9,260 crore as on March.
Put together, Vedanta generates robust cash from its metals and minerals business. For 2009-10, its earnings before interest, depreciation, tax and amortisation was $2,296 million (Rs 10,560 crore). This was $794 million (Rs 3,650 crore) for the quarter ended this June. Vedanta also owns a power generation company, Sterlite Energy, planning to tap the market in the current year. This company has operating assets worth 600 Mw, with commissioning slated for September; in addition, work to increase the capacity to 4,380 Mw by September 2013 is already under way. This would further boost the group’s cash flows.
With such strong cash flows, and last year’s failed attempt to acquire US-based copper mining company Asarco, the recent move to acquire Cairn India does not look surprising, though its entry into a new segment, viz. oil and gas, did surprise. Additionally, Cairn India’s cash flows could also be partly used to repay the acquisition-related debt Vedanta will take for buying it. Cairn India is estimated to report a net profit of Rs 4,814 crore in the current financial year and over Rs 12,800 crore in 2011-12, according to a July 28 report by Goldman Sachs.
Among Anil Agarwal’s key moves in the last decade was an attempt to take full control of Sterlite Industries around mid-2002, acquisition of 26 per cent in Hindustan Zinc in April 2002 and a majority stake in Sesa Goa in April 2007. The first two moves came just a few months before the commodities bull run started (metal prices were then around their lowest in the decade). Even in the case of Sesa Goa, the run-up in iron ore prices was in the early stages of the bull run.
As there is no clarity over how the deal will finally get structured, the news led to initial panic among investors. There was a sharp decline in the share price of Sterlite Industries, Vedanta’s India-listed subsidiary which produces metals like aluminium and copper. On a day when the Sensex was up 0.5 per cent, Sterlite fell 4.26 per cent to Rs 160.70, on fears that this mammoth deal will be routed through this company.