Deal may cost the metal player $8 billion.
In a move which could see the country’s biggest metal player’s entry into the crude oil business, Vedanta Resources Plc is looking for a “majority stake” in Cairn India. The London Stock Exchange-listed Vedanta Resources is negotiating with Cairn Energy Plc, the British company owning 62.4 per cent in Cairn India, for a controlling stake.
An executive close to the development told Business Standard Vedanta wanted to get a “minimum 50 per cent” stake but the British parent did not want to give up “substantial” equity in Cairn India, that contributes nearly 95 per cent to its total oil and gas production. At current valuations, a 51 per cent stake in Cairn India could see the deal being struck at $8-8.5 billion.
Though there were reports stating that Vedanta Chairman Anil Agarwal met Cairn Energy Chief Executive Bill Gammell and a deal was expected to be sealed on Monday, a Vedanta Resources spokesperson did not confirm this. Cairn Energy’s spokesperson was unavailable for comment.
Analysts said funding for the deal was likely to be a major issue, especially if Vedanta went for a complete buyout of Cairn Energy’s interest in the Indian company. Not only would it be Vedanta’s first buyout in oil and gas but also the country’s first such deal where a private parent company exits in favour of another from three producing assets. The last such deal was in 2002, when BG had acquired a 30 per cent stake in the Panna-Mukta-Tapti (PMT) fields, following its acquisition of Enron Oil and Gas India.
The PMT fields, however, were discovered and then privatised by the government, unlike Barmer, where Cairn discovered and is producing the crude oil. The Barmer oil production in Rajasthan, in which government-owned Oil and Natural Gas Corporation has 30 per cent stake, helped Cairn Energy emerge from a small exploration company to a major oil producer.
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Cairn had bought stake in the block from Shell for £5 million in 1995. With crude oil discovery in 2004, ONGC stepped in as the government nominee, with 30 per cent stake in the onshore block. The group spun off its Indian operations in January 2007, when Cairn India was listed on the Bombay Stock Exchange.
Cairn Energy, perceived to be an explorer that preferred to exit a block once a discovery was made, graduated to a major oil producer last year. The Barmer field contributes about 18 per cent to India's production of 674,000 barrels a day.
Malaysia's Petronas, a strategic partner with Cairn Energy in three of its assets — in Bangladesh, India and Greenland — had last year bought an additional 2.3 per cent stake in Cairn India from the British parent for around Rs 1,100 crore, raising its total holding in the company to 14.94 per cent. Though a person close to the development denied the mining major was in talks with Petronas, Vedanta's acquisition of a majority stake would require that Cairn Energy consider its Malaysian partner's stand, too. Besides, Vedanta's acquisition of more than 15 per cent stake in Cairn India would mandatorily trigger an open offer.
When asked to comment, Rahul Dhir, chief executive of Cairn India, told reporters today, “I don't think they are exiting the business. They are just selling stake.” He was coming out of a meeting with Petroleum Secretary S Sundareshan.
Sundareshan said a company that had signed a production sharing contract (PSC) with the Indian government for an oil exploration block would need the latter’s approval if some stake in the field or the company were to be sold. “All PSCs have provisions for appropriate government approvals before such changes in the ownership are made,” he said. “What I do know is that they (Cairn Energy) remain a very strong supporter of our business.”
“If a new strategic shareholder is coming, it only underscores the belief that they have in our business," Dhir added.
Though Cairn Energy requires massive investment in its business elsewhere in the world, including Greenland, the importance of Cairn India to Cairn Energy's portfolio can be gauged from the fact that of its global investment plan of $1.52 billion, as much as 70 per cent is focused on its Indian assets.
Besides, Cairn Energy in a recent presentation said, "the Rajasthan asset provides platform for future growth" and "reinvestment opportunities remain focused on the Rajasthan development and drilling in Greenland". In an interview to BBC last year, Gammell had said the challenge before the company was the cost of drilling. "As opposed to drilling a well in Rajasthan, where it might cost us $1 million, in Greenland it might cost us $100 million.”