The Cairn India-Vedanta merger has seen much debate, but here are three key questions shareholders of the two companies must ask the managements:
1. The Vedanta group, on Sunday, emphasised more than one time that the merger move was more to simplify the corporate structure rather than gaining access to Cairn’s cash balances contrary to the belief of some market participants. The question is why should Cairn’s shareholders be left with a complex and diversified set of businesses that range from base metals to iron ore (steel) to oil and gas, whose dynamics are far different for a lay investor to understand. Instead Cairn is a pure-play on crude oil and its business of oil and gas is much more sorted out and simple to understand. Though it is equally global in that sense, the producers of oil (globally) also have more control over pricing than producers of metals. So, while the deal is simplifying the corporate structure for Vedanta shareholders, it will make things more complex for Cairn India’s shareholders.
2. On the operations front, while the managements said that Cairn is in the process of deploying various technologies to enhance output in the medium term, it would help Cairn’s shareholders if the output is raised before the merger move is initiated. Stagnant output has impacted sentiments and share valuations of Cairn India.
Secondly, while the claim is that the merger will help effective utilisation of Cairn’s cash, it will make more sense if the company utilises this cash now for acquiring global assets given that low crude prices would have made valuations of such assets more reasonable than about 12-18 months ago.
Secondly, while the claim is that the merger will help effective utilisation of Cairn’s cash, it will make more sense if the company utilises this cash now for acquiring global assets given that low crude prices would have made valuations of such assets more reasonable than about 12-18 months ago.
3. Thirdly and more importantly, while replying to analysts in a conference that was held on Sunday evening, the group’s executives said that the merger valuations to some extent take into account the potential tax liability on Cairn India. They, however, didnot give any figures. While this would have had some unfavourable impact on Cairn’s valuations, in an answer to a question by another analyst they also said that the group has recourse to Cairn Energy Plc (from whom Vedanta group acquired Cairn India) in case the tax liability materialises. In such a case then, shouldn't the merger valuation consider the tax liability of Cairn India at nil rubbing off positively on its valuation?
On the whole and looking at other parameters too, the deal appears more beneficial for Vedanta shareholders than for Cairn India’s even as there are some gains for the latter.
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