 "Tom Albanese")
Vedanta is merging with its oil producing subsidiary, Cairn, at a time when crude oil prices have dropped substantially. Tom Albanese, chief executive officer at London-listed parent Vedanta Resources, argues that with falling oil prices, there is growing recognition of the need for a diversified resources company. Excerpts of a talk with Abhineet Kumar, Aditi Divekar & Kalpana Pathak:
Since Cairn has substantial cash on its books and Vedanta is in debt, there is a strong view that the sole purpose of this merger is to de-leverage Vedanta...
We have already said we can bring down the debt of Vedanta without this merger. The main reason for this merger is the simplification and having a diversified national resource champion for India. One company has cash, another has debt, and that will reflect in the valuation. And, if you look at the net debt levels of Vedanta Ltd, they also have a robust balance sheet. For Vedanta Plc, where the debt is higher, the merger does not change the net debt position. So the purpose is to have a simpler and a more robust company.
Minority shareholders are concerned that this might not be the right time to value Cairn for such a merger.
A couple of questions come up in this regard. First, do you want to be an investor in a pure-play oil and gas company, and is this merger fair in valuation? A year or so before, everyone would have been looking for being invested in an independent oil and gas company. When crude oil was over $100 a barrel, there was a different perception about where the world is headed. Now, with crude at $50-60 a barrel, the top line has been cut by 50 per cent for the global oil and gas sector. If you ask any other industry what if their top line is cut by 50 per cent, the answer is, they will stop. So, there is growing recognition at this time for a diversified resource company. Now comes the question, if the merger is happening, is it at fair valuation? We have involved the most respected banks to value it. Any differences between Cairn and Vedanta — one having cash. one having debt, one having oil and the other in metals — are properly assessed for valuation.
Do you expect any resistance from minority shareholders after this announcement?
Finally, the decision for Cairn to be merged with Vedanta is entirely in the hand of minority shareholders. They have a choice. Do they see value in a diversified player? Is the valuation correct? They have to decide. The market was anticipating one share to one share but what we have offered is actually 1:1.04, when you consider the convertible preference shares. What we have offered is in excess of the seven per cent premium to Friday's closing.
How do you see your next plan, for merging Hindustan Zinc and Bharat Aluminium with Vedanta, becoming a success?
Anything to do with these two companies is completely at the pleasure of the government, as they have the veto power with their residual stakes in these two companies. I do believe they will make the decision in due course.
You recently brought down the capital expenditure for Cairn. As the cash of Cairn will become a part of Vedanta, do you see this affecting its growth plans?
The capital expenditure for Cairn has been reduced significantly but that was independent of any merger consideration. It was entirely based upon the drop in oil prices. We had planned projects assuming crude at $85 a barrel and those plans were not robust at $50-60 a barrel. That led to a reduction in capital expenditure.
Cairn's management has said they are hopeful of continuing to grow. They have to take their calls. They are also coming up with the largest project in Cairn's history, an EOR (Enhanced Oil Recovery) project. The strategy for Cairn will not change with this merger.
Since Cairn has substantial cash on its books and Vedanta is in debt, there is a strong view that the sole purpose of this merger is to de-leverage Vedanta...
We have already said we can bring down the debt of Vedanta without this merger. The main reason for this merger is the simplification and having a diversified national resource champion for India. One company has cash, another has debt, and that will reflect in the valuation. And, if you look at the net debt levels of Vedanta Ltd, they also have a robust balance sheet. For Vedanta Plc, where the debt is higher, the merger does not change the net debt position. So the purpose is to have a simpler and a more robust company.
Minority shareholders are concerned that this might not be the right time to value Cairn for such a merger.
A couple of questions come up in this regard. First, do you want to be an investor in a pure-play oil and gas company, and is this merger fair in valuation? A year or so before, everyone would have been looking for being invested in an independent oil and gas company. When crude oil was over $100 a barrel, there was a different perception about where the world is headed. Now, with crude at $50-60 a barrel, the top line has been cut by 50 per cent for the global oil and gas sector. If you ask any other industry what if their top line is cut by 50 per cent, the answer is, they will stop. So, there is growing recognition at this time for a diversified resource company. Now comes the question, if the merger is happening, is it at fair valuation? We have involved the most respected banks to value it. Any differences between Cairn and Vedanta — one having cash. one having debt, one having oil and the other in metals — are properly assessed for valuation.
Do you expect any resistance from minority shareholders after this announcement?
Finally, the decision for Cairn to be merged with Vedanta is entirely in the hand of minority shareholders. They have a choice. Do they see value in a diversified player? Is the valuation correct? They have to decide. The market was anticipating one share to one share but what we have offered is actually 1:1.04, when you consider the convertible preference shares. What we have offered is in excess of the seven per cent premium to Friday's closing.
How do you see your next plan, for merging Hindustan Zinc and Bharat Aluminium with Vedanta, becoming a success?
Anything to do with these two companies is completely at the pleasure of the government, as they have the veto power with their residual stakes in these two companies. I do believe they will make the decision in due course.
You recently brought down the capital expenditure for Cairn. As the cash of Cairn will become a part of Vedanta, do you see this affecting its growth plans?
The capital expenditure for Cairn has been reduced significantly but that was independent of any merger consideration. It was entirely based upon the drop in oil prices. We had planned projects assuming crude at $85 a barrel and those plans were not robust at $50-60 a barrel. That led to a reduction in capital expenditure.
Cairn's management has said they are hopeful of continuing to grow. They have to take their calls. They are also coming up with the largest project in Cairn's history, an EOR (Enhanced Oil Recovery) project. The strategy for Cairn will not change with this merger.
