$10-bn deal seen as huge gamble for Anil Agarwal
In one of the biggest buyouts of a domestic company, London Stock Exchange-listed Vedanta Resources will take a majority stake in Cairn India for almost $10 billion. The Anil Agarwal-promoted group will purchase at least 40 per cent from the Edinburgh-based Cairn Energy Plc and the rest through an open offer.
The group that rode the global commodity boom now plans to saddle the riskier oil and gas exploration and production business. Besides the three discovered fields in Rajasthan, Gujarat and Andhra Pradesh, Cairn India has investment commitments in more than half-a-dozen blocks in India and Bangladesh.
On completion of the deal, Vedanta Resources is expected to hold 31-40 per cent in Cairn India directly and 20 per cent through Sesa Goa Ltd. The entire deal is structured so that the group holding in Cairn India would be between 51 and 60 per cent at a cost of around $8.5-9.6 billion in cash.
“All the debt is being raised in dollars, and we are very comfortable with this. It is going to be for two years. After that, we can always rollover or refinance it. The annual interest payment is going to be about $350 million and we can easily service the debt,” said Anil Agarwal, the Vedanta chairman.
The transaction is expected to close early next year. Up to $6.5 billion of confirmed bank debt has been tied up for Vedanta Plc, with a minimum maturity of two years plus.
Shares acquired from Cairn Energy will be at Rs355 a share, with Vedanta paying a non-compete fee of another Rs50 a share. The deal will set a benchmark for future buyouts in the country’s oil and gas industry. Valuations of reserves per barrel of oil equivalent will also be closely followed.
Analysts, though, do not view the deal as being good for shareholders of either Vedanta or Cairn India. “The deal may prove to be a big gamble for Vedanta and Anil Agarwal considering the sheer size of the transaction. The total market capitalisation of Vedanta is around $9 billion. And the current deal size with Cairn Energy is $8.5-9.6 billion. To put it in other words, Vedanta will put the entire company at stake for the sake of this deal,” said Jagannadham Thunuguntla, equity head at SMC Cap.
The benefit of the no-compete fee, valued at roughly Rs3,570 crore, will not flow to the remaining shareholders either, since it will not go towards calculations for pricing the open offer, though the draft takeover recommendations say that there should not be any payment of non-compete fees in future deals. Since the deal announcement came earlier, the existing norms will be applicable.
Parent Cairn Energy and its overseas investors, including CEO Bill Gammell, will be the biggest beneficiary of the deal , which was struck one year after its Mangala field in Barmer district of Rajasthan started crude oil production.
The number of shares held by Gammell in the parent company has risen about ten times to 331,778 as on March 16, 2010 from 37,302 as on September 25, 2009.
The non-compete fee has been paid to bar Cairn Energy from competing with Cairn India in India, Nepal, Sri Lanka and Bangladesh, though another subsidiary, Capricon Oil, already holds assets in Bangladesh and Nepal.
Cairn Energy, which has always focused on exploration rather development and production of oilfields, plans to use the entire proceeds on its Greenland assets. “The transaction will also ensure we have the financial flexibility to focus on an active multi-year exploration and drilling programme in Greenland and also consider further material growth opportunities,” said Gammell.
Malaysian oil major Petronas is its partner in Greenland and Bangladesh besides being an almost 15 per cent shareholder in Cairn India.
Cairn UK Holdings, a wholly-owned subsidiary of Cairn Energy, will sell THL Aluminium, a wholly-owned subsidiary of Vedanta, by a maximum 51 per cent of the fully-diluted share capital at completion of the open offer and the deal. Upon completion, Cairn Energy will have a residual interest of 10.6-21.6 per cent of the fully-diluted share capital.
Cairn India on Monday touched a new high of Rs 368 at the Bombay Stock Exchange. However, it closed at Rs 332.85, down 6.36 per cent. Sesa Goa, the Vedanta group company that will acquire a stake in Cairn India, lost 8.90 per cent to close at Rs 322.55, while Sterlite Industries, another group company, closed flat at Rs 160.60. At the London Stock Exchange, shares of Vedanta and Cairn Energy were up by 4.9 and 5.3 per cent, respectively, at 21.30 IST.