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A day after the announcement of Cairn India’s merger with Vedanta, focus has now shifted to whether Life Insurance Corporation of India (LIC) and Cairn Energy Plc, two crucial minority shareholders, will allow the merger to come through. Nevertheless, several brokerages believe the deal will not benefit Cairn India’s minority shareholders significantly. Also, they estimate the merged entity’s return ratios and earnings per share (EPS) to be impacted following the merger.
“The merger will result in a write-off of goodwill related to the Cairn acquisition. This will result in a 7-22 per cent increase in FY2016-18 estimated EPS due to a decline in the goodwill amortisation charge. On an ex-goodwill basis, our pro-forma EPS estimate for FY2016-18 will be lower by 1-7 per cent,” say analysts at Kotak Institutional Equities. Cairn Energy Plc with 9.8 per cent and LIC with 9.1 per cent stake form nearly half the total minorities’ shareholding in Cairn India. Hence, an approval from the two entities is crucial for the deal to come through.
“Our scenarios suggest their (Cairn minorities’) risk/reward is more favourable in an independent Cairn than a merged Vedanta,” said a Barclay’s report. Commodity prices are soft, regulatory hurdles in Vedanta Aluminium persist, power is under strain and even a merged Vedanta, without Hindustan Zinc, will have a stretched balance sheet – especially if Vedanta Plc needs support for servicing its debt, the report added.
Giriraj Daga, portfolio manager at SKS Capital & Research, seconds this view. “The deal continues to remain raw for those shareholders of Cairn India, who entered the stock with the idea of being only in the oil & gas business. If shareholders have entered with the intention of being part of the overall growth rather than just one business, this deal would be good for them.”
Others have questioned the need for diversification. “Why does Cairn India need diversification of business in the first place when it is doing so well independently? Secondly, how is diversification by getting into a weaker balance sheet (that of Vedanta) going to benefit Cairn shareholders?” said an analyst with a foreign brokerage who sees the merger deal raw for Cairn minorities. Some analysts, however, also believe minority shareholders have little choice. “I don’t see Cairn minorities having much choice. It’s not like if the merger does not happen, share price (of Cairn) is going to zoom as such. Plus, they (Cairn India shareholders) were independent for so long but they could not make most of it even when they were cash rich. They could have utilised their funds better,” added Daga.
Daga, too, believes it is better to align investor interest with the interest of the promoter.
“Second, there is commitment from the management that it is not going to use the Cairn India cash for debt reduction on its (Vedanta) books. Thus, it appears to be a fair deal for Cairn minorities,” Tandon added.
“Net debt to Ebitda of the merged entity will improve from 14.2x earlier to 4.6x among the fungible cash flow businesses. Cairn shareholders will now get additional exposure to low-cost high-quality diversified set of metals business. Accumulated cash on Cairn’s balance sheet will now yield better returns,” a Motilal Oswal report explained.
On the whole, the move to merge the entities is seen as Cairn India coming to the rescue of its debt-burdened parent, Vedanta. As on March 31, 2015, the gross debt of Vedanta on standalone basis was about Rs 35,000 crore while on consolidated basis, it stood at Rs 72,000 crore. On the other hand, Cairn India has cash reserves of close to Rs 17,000 crore apart from the profits it has been generating.
