State-owned Oil and Natural Gas Corp (ONGC) may have to pay over $13 billion if it were to exercise its pre-emption or right of first refusal to buy Cairn India in the giant Rajasthan block.
Cairn India holds 70 per cent operator interest in the 6.5 billion barrels Rajasthan block that is at the centre of its parent, Cairn Energy Plc's $8.48 billion deal to sell its majority stake in the company to Vedanta Resources.
At Rs 355 a share (the price at which Vedanta is acquiring Cairn Energy shares), Cairn India is valued at over Rs 67,355 crore or $14.6 billion. Almost 90 per cent of this value is because of the Rajasthan block that can produce 240,000 barrels of oil per day (12 million tons per annum).
"Cairn India's stake in Rajasthan block will be valued at $13 billion," a source involved in the process said.
ONGC believes that by virtue of holding 30 per cent in the Rajasthan block, it has the pre-emption or ROFR to buy Cairn India in case the company's ownership changed.
If it has objections to the Cairn Energy-Vedanta deal, it will have to seek to buyout Cairn India in the Rajasthan block by making a higher offer that would work out to $13 billion, he said.
But ONGC will have to make up its mind fast as it has time only till September 7 to decide. Vedanta's open offer to minority shareholders of Cairn India for acquisition of 20 per cent shares, puts September 7 as the cut off date for any rival offer, the source said.
Also, as per UK takeover rules, Cairn Energy Plc has to seek shareholders' nod and other regulatory approvals for the sale before Vedanta's open offer opens on October 11.
"That means, it will have to publish a prospectus for the sale by mid-September and call Extraordinary General Meeting of shareholders by end September or early October," he said.
A rival offer or a competitive bid like the one from ONGC would have to be made before the EGM so that it can then approach SEBI to stop Vedanta's open offer, the source said.
"To buy Cairn India's stake in Rajasthan block, it has to seek Board approval, appoint merchant bankers, seek Cabinet nod and make rival offer all in a month's time," he said.
The source said the best deal for ONGC would be to seek operatorship or management control of the Rajasthan block in lieu of giving a go-ahead to the Cairn-Vedanta deal.
The Production Sharing Contract (PSC), which Cairn has signed with the government, for the Rajasthan block, provides for explicit government approval only in case of a party selling its interest in the block, but does not make the nod mandatory in case of change of ownership at corporate level.
The Joint Operating Agreement, between Cairn India and ONGC, gives partners pre-emption rights in case of sale of interest by either parties but not in case of corporate ownership change.
Cairn Energy is selling up to 51 per cent stake in Cairn India to Vedanta for $8.48 billion at Rs 405 per share, a price that includes a non-compete fee of Rs 50.
The source said, Rs 355 per share is the price at which Vedanta is making an open offer to buy 20 per cent shares from minority shareholders of Cairn India after excluding the non-compete fee.
"Everybody is fishing in troubled waters. Some reports suggest that ONGC should get the non-compete fee. How is it possible. Vedanta is paying the non-compete fee to Cairn Energy to keep it out of bidding from forthcoming New Exploration Licensing Policy (NELP) rounds. Can ONGC afford to keep out of NELP?" he said.
On talk of state oil firms joining together to make a rival bid, the source said the bid would have to be at Rs 425-430 to beat Vedanta's Rs 405 a share offer. "And this kind of bid has to be put together in a very very short time."
Also, the suitor would have to pay a $100 million break-fee to Cairn Energy for breaking its deal with Vedanta.
Even the ROFR that ONGC claims can be challenged by Cairn Energy, as it is not selling its participating interest in the Rajasthan block and the deal with Vedanta is more of a corporate ownership change, the source said, adding the matter would in that case have to be sorted out in the court.
Cairn maintains that the Vedanta deal was a controlling stake transfer and not an asset transfer which would have triggered a government approval but the oil ministry maintains that since the PSCs for some of the Cairn other blocks has provision for prior consent, the whole deal is contingent on government approval, the source said.
