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The merger of Cairn India with Vedanta was never going to be easy. Days after billionaire Anil Agarwal announced that he would merge the energy company into its parent, state-owned Life Insurance Corp (LIC), a minority shareholder of Cairn India, raised its concern over the valuation for the merger and the debt of the merged entity.
LIC owns 9.06 per cent of the cash-rich Cairn, which makes it the second largest minority shareholder after Cairn Energy which owns 9.82 per cent. Together, they represent a little less than half of the 40.12 per cent non-promoter stake in the company. For the proposed merger to go through, at least 50 per cent of the minority shareholders have to vote in favour of the deal. This makes a nod from LIC and Cairn Energy crucial.
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"The government has in the past vetoed the merger of Hindustan Zinc and Balco (group companies of Vedanta) and is still undecided on the sale of its residual stake in these two companies. It will be interesting to see how LIC, being government owned, will vote on the merger," Simone Reis, co-head (mergers & acquisitions and private equity) of law firm Nishith Desai Associates, says.
Some have started to support LIC's stance that the merger is against the interests of the minority shareholders. Under the offer, the shareholders of Cairn India will receive one Vedanta share for every Cairn India share they hold and one preference share with a coupon of 7.5 per cent.
"The offer made to the minority shareholders is certainly poor as the sweetener of 7.5 per cent preference share redeemable after 18 months is miniscule. As it is, Cairn India shares have lost nearly 50 per cent value in the last one year and now locking the merger at this price makes it a really poor deal. I hope LIC continues to oppose (the merger) strongly," says Sriram Subramanian, managing director of proxy advisory firm Ingovern.
However, some analysts feel LIC may finally vote in favour of the merger. "Given its history, a strong stance for the longer period is not foreseen, although it would make sense if LIC does so this time. If LIC maintains its current position, it's going to be difficult for the Vedanta-Cairn merger to go through," says an analyst with a foreign brokerage.
Cairn India Chief Executive Mayank Ashar remains positive about the deal. "This deal is good for Cairn. The strategic rationale for this is that we go from having exposure to a single commodity to being part of India's national resource champion."
Cairn Energy, the other key minority shareholder, appears undecided on the merger. "We noted the announcement from Vedanta and will assess whether the proposal is in the interest of Cairn Energy as a shareholder in Cairn India in due course," the company said in a statement.
That's not all. The demand made by the income tax department on Cairn India is another hurdle that Agarwal will have to clear during the merger. The department has slapped a tax demand of Rs 20,495 crore on the company for failing to deduct withholding tax on alleged capital gains made by its erstwhile promoter, Cairn Energy. After the merger was announced, the department said it will defend the tax claim it has made on Cairn India, even after the company is merged with its parent. "Given that any transfer of shares held by Cairn Energy in Cairn India has been frozen by the tax authorities, Vedanta will need to seek permission from the authorities to issue Cairn Energy new shares to give effect to the merger," Reis says.
The tax demand could spook Vedanta shareholders who will inherit the liability, especially when the company is already laden with debt. "The Vedanta shareholders could raise concerns on this front," says Anand Prasad, partner of Mumbai-based law firm Trilegal.
Many obstacles
India's laws require Vedanta to take the High Court's permission before the merger, which some feel could pose a few problems. "Vedanta will have to provide adequate comfort to the courts that it has sufficient resources to make good the tax liability," adds Reis.
The third crucial approval will have to come from the Union ministry of petroleum.
Vedanta will now have to seek the ministry's approval for changing ownership of all Cairn India's oil and gas assets, including the Barmer block in Rajasthan and the Ravva oil and gas field in the Krishna-Godavari basin. The Barmer block in Cairn's portfolio is the biggest revenue generator and its contract for the block is coming to an end in 2020. If the contract is not renewed, Cairn would have to return the field to state-run Oil and Natural Gas Corporation, which is the original licensee and holds 30 per cent stake.
The ministry would be concerned over the energy security of the country and would also want to know the merged entities' plans to invest in the sector and add reserves, especially when the motive of the merger is seen as access to Cairn India's cash to lower Vedanta's debt of over Rs 75,000 crore.
"There is the possibility that the petroleum ministry may bring in additional conditions which would include increase in profit share (currently 50 per cent)," says an analyst with a local brokerage.
With all these stumbling blocks, analysts as well as law firms say the merger would take more than a year to come into effect, contrary to Vedanta's estimate of six to eight months. "Assuming there are no challenges, such approvals usually take eight to ten months. Here, as we do see some hurdles, it may take about 12 months or a little more for the merger to become effective," says Giriraj Daga, portfolio manager with SKS Capital and Research.
Agarwal, for his part, is used to negotiating such challenges. When he merged Sterlite Industries into Sesa Goa to form Sesa Sterlite (now known as Vedanta), a creditor and an investor of Sesa Goa had challenged the order in the Goa bench of the Bombay High court. As a result, the merger, which was announced in February 2012, happened only in August 2013, after a whole year and a half.
Will this ride be easier?
