Cairn India's merger with Vedanta may fall through

Majority of minority shareholders say no to merger move

Billionaire Anil Agarwal’s plans to merge his two India listed companies, Vedanta (earlier known as Sesa Sterlite) with oil producer Cairn India, might fall through with two large minority shareholders — Life Insurance Corporation of India (LIC) and Cairn UK Holdings — deciding to vote against the move.

Corporate lawyers say with a majority of the minority shareholders saying no, the proposal will not pass the muster in shareholders’ meeting.

The promoters own 60 per cent stake, while LIC owns 9.06 per cent stake in Cairn India. UK-based former promoter, Cairn Holdings, owns another 9.82 per cent in the company.

“Of the 40 per cent stake held by the minority shareholders, if majority of them (21 per cent of Cairn India’s equity) vote against the move, then the merger will fall through as per the existing law,” said R S Loona, a Mumbai-based corporate lawyer.

Reacting to the news, the shares of Cairn India shot up by 6.2 per cent to close at Rs 177 a share as investors cheered that the company will now be forced to offer increased dividend. Vedanta has the option to sweeten the deal for the minority shareholders and investors say they will wait for an offer from Vedanta to take a call on the next course of action.

An e-mail sent to Vedanta on Thursday morning did not elicit  response.

A CLSA analyst said Vedanta has a fairly stretched balance sheet and if the Cairn-Vedanta merger does not go though, Vedanta will be forced to have Cairn India increase its dividend payout or even offer a special dividend to the shareholders.  

Shareholders of Cairn India, like LIC, had earlier objected to a cheap loan worth $1.25 billion granted by the company to its parent, Vedanta. The promoters had used the cash to repay its $10 billion acquisition of Cairn India from Cairn in 2010.

A Kotak analyst said the failure to merge Cairn with Vedanta would make it difficult for the latter to access Cairn’s cash flows unless through tax-inefficient dividends and might warrant a holding company discount.

“The merger with Cairn India is critical to Vedanta (and Vedanta Resources) as it will substantially improve tight liquidity at the parent entities given the large debt and limited cash flows,” Kotak analysts Kawaljeet Saluja and Abhishek Poddar wrote in a note to their clients on Thursday.

Vedanta’s parent entity, Vedanta Resources, had net debt of $7.7 billion as of March on its balance sheet, while solely relying on the cash flows from Indian subsidiaries for debt servicing as its Zambian copper operations struggle with low profitability, said Kotak.

“Vedanta Resources has debt maturity of $2.4 billion due in FY16/17. Vedanta Resources had earlier loaned $2.7 billion to Twin Star Mauritius Holdings (TSMHL), wholly-owned subsidiary of Vedanta (India), and debt pertains to the Cairn India acquisition. We believe the merger can facilitate loan repayment by TSMHL to Vedanta Resources, thereby, easing the high leverage at the parent entity,” it said.

Cairn India shareholding pattern*:

Promoters: 60%

LIC:  9.06

Cairn UK: 9.82%

FIIs/Others:  21.12%

*Source: Bloomberg