Proxy firms divided over Cairn-Vedanta merger

SES recommended against citing lack of transparency, IiAS asked shareholders to vote for the move citing various benefits

Proxy advisory firms Stakeholders’ Empowerment Services (SES) and Institutional Investor Advisory Services (IiAS) have given opposite recommendations to the shareholders of Vedanta on its proposed merger with Cairn India. The recommendations to Vedanta shareholders came ahead of the court convened meeting scheduled on September 8. LIC, Franklin Templeton and HDFC Mutual Fund are among the prominent institutional shareholders of Vedanta, in which public shareholders own a little over 37 per cent.  

A DETAILED LOOK

Old terms of merger

• Announcement date: June 14, 2015  
• One equity share for one equity share of Cairn
• One 7.5% redeemable preference share for one equity share
• 7.3% premium to the previous close

New terms of merger

• Announcement date: July 22, 2016
• One equity share for an equity share of Cairn
• Four 7.5% redeemable preference shares for one equity share
• 20% premium to the one-month volume-weighted share price of Cairn shares

SES asked shareholders to vote against the move saying that the revised merger terms favoured Cairn India shareholders at the expense of shareholders of Vedanta.

In the original terms of the merger announced in June 2015, one equity share of Cairn India was to get one equity share and one preference share in Vedanta.  According to the revised terms, which were put before shareholders in July this year, Cairn India shareholders would get three more preference shares of Vedanta.   

The audit committee has stated that the change in ratio was done on account of : changes climate of Indian market and change in commodities price. SES was convinced with this reasoning. It said it was unable to find any acceptable logic for such a change, which on one hand benefits Cairn shareholders and on the other hand is detrimental to Vedanta shareholders. “Therefore, purely on following issues, SES recommends vote AGAINST: - Lack of transparency as to why the merger did not happen in 2015,  Reasons for revision in exchange ratio and How revised exchange ratio will benefit Vedanta shareholders as compared to the old exchange ratio,” the firm said in its report.

On the other hand, IiAS recommended investors to vote for the merger proposal. “The merger will create a large diversified natural resources player with reduced earnings volatility and enable better allocation of capital. Vedanta will have direct access to Cairn’s Rs 17,400 crore  cash resulting in an improvement in overall credit quality of the merged entity. The merger will facilitate further diversification.”

Under the head ‘stated benefits’ IiAS said, “Consolidation of the mining and oil and gas businesses will lead to simplification of the overall group structure. The combined entity is expected to benefit from having a diversified product mix. The diversified product mix will reduce the earnings volatility Greater financial strength due to increase in asset base, revenues, production volumes and service range.”

In response to an email seeking comments on concerns raised, a Vedanta spokesperson said, "Merger was dependent on regulatory approvals such as permission from respective High Courts to convene the shareholders meeting. Once permission received from the respective High Courts, shareholders meetings have now been convened (and will be held in September)."

The revised offer was made following joint valuation report from World's leading consulting firms — PricewaterhouseCoopers and Walker Chandihok & Co LLP and a fairness report from DSP Merrill Lynch Limited. Post their concurrence to the revised offer, the Boards of Cairn and Vedanta approved the revised offer while noting the changed market conditions and commercial factors, the company added.

Explaining the reasons for revision of terms, the spokesperson said that the commercial factors and market conditions have changed over last one year. "This includes drastic fall in prices of crude oil and other commodities, leading to change in business dynamics."  According to her, while retaining the upside from Cairn’s strong oil & gas assets, its shareholders will now benefit from exposure to a diversified portfolio of world-class, low cost, long-life assets with significant growth. The financial strength and diversified portfolio of Tier-I assets of Vedanta will provide de-risked earnings and stable cash flows and drive long-term value.   

From Vedanta shareholders' perspective, there were several positives to the deal, according to the company. These include de-risking of earnings volatilty, strong cash flows, stronger balance sheet that could reduce cost of capital, greater financial flexibility and cost savings, which could lead to future rerating.

Company sources also referred to several analyst reports which had given a positive view on the merger soon after revised terms were announced. A Credit Suisse report said, “We expect the sweetened terms to be acceptable to minority shareholders, and the transaction to close by Mar-17.” HSBC put a buy report on Vedanta titled , “Adding sweetener to make the deal savoury.”

CLSA had predicted a possible rerating for the Vedanta stock upping its target price from Rs 166 to Rs 205. Vedanta shares closed in green at Rs  174.85 on Tuesday, up about 11 per cent from the closing price of July 21, a day before revised terms were announced.

Approval of minority shareholders is critical for the clearance of the deal. Both companies have approached the courts to approve the transaction.  Shareholders have been asked to provide their consent through two modes: Court Convened Meeting (CCM) and Postal Ballot (PB).

“In the Postal Ballot, since promoters will not get to vote, the Voting Multiplier effect kicks in: given the 40 per cent ownership of minority investors in both companies, each share will be equal to 2.5 votes,” IiAS noted.