Vedanta not to pay non-compete fee in Cairn deal

More than 11 months after Vedanta Resources announced purchase of a majority stake in Cairn India from Cairn Energy, the two companies have announced new deal terms.

Vedanta will now not pay Cairn Energy a non-compete fee. This will provide it a cushion for taking the royalty hit on production from the Barmer block that has now become certain.

Besides, the sale would be in two tranches of 10 per cent and 30 per cent, of which only the second would be subject to government approval, said Cairn Energy.

“The sale and purchase of the first tranche of shares, being 10 per cent of the fully-diluted share capital of Cairn India, will be completed on or before July 11,” it said.

The removal of non-compete and associated fee was expected to result in a 5.3 per cent fall in post-tax proceeds, it said. It will lower the effective price from $8.66 (Rs 405) a share to $7.85 (Rs 355) a share.

Vedanta’s acquisition of a 10 per cent stake will take the group’s stake in Cairn India to 28.5 per cent. Cairn Energy PLC will retain control with 52.2 per cent holding.
 

THE NEW DEAL

* Cairn Energy to sell 10% + 40% at Rs 355 a share

* Vedanta’s Sesa Goa bought 8% at Rs 355 in an open offer that ended on April 30, 2011 

* Petronas sold its 10.5% at Rs 331 to Sesa Goa on April 19, 2011

The changes, after a government decision that forced Cairn India to accept royalty payment on crude oil from the Barmer block, would be viewed positively by investors, said Jagannadham Thunuguntla, strategist and head of research, SMC Global Securities.

“The companies are playing safe and have showed that they are ready forgo privileges to see the deal through,” he said.

Though Cairn Energy would take a hit of about Rs 3,750 crore, it was better to get a guaranteed Rs 355 a share than Rs 405 a share, said Thunuguntla. “Vedanta has successfully put its foot in Cairn’s door.”

Till now, ONGC, being the licensee of the Barmer block, was paying royalty on the entire production. A calculation by ONGC, Cairn India’s 30 per cent partner in the block, estimated an outgo of more than $908 million over the life of the field (at a crude oil price of $75 a barrel) for Cairn India on account of royalty payment. With removal of the non-compete fee, this would be neutralised for Vedanta.

Vedanta, through Sesa Goa, has already bought a 18.5 per cent stake in Cairn India. It acquired 8 per cent for Rs 355 a share in an open offer and 10.5 per cent from Petronas at Rs 331 a share.

Gross proceeds from sale of a 40 per cent stake would be a little over $6 billion with net proceeds after tax expected to be $5.4 billion. Of this, $1.4 billion will come in the first tranche. The amount paid for a 40 per cent stake would fall from $6.6 billion to $6 billion, said a statement by Vedanta Resources.

Anil Agarwal, the executive chairman of Vedanta, said with the initial 10 per cent purchase, the company looked forward to successful completion of the proposed transaction.

On May 27, a group of ministers headed by Finance Minister Pranab Mukherjee decided to recommend cost recoverability of royalty and cess on crude oil from Cairn India’s Mangala field in Rajasthan.

“Cairn Energy is comfortable with the changes as this positive signal from Vedanta can allow the government of India to provide clarity on this important transaction. Monday’s announcement ensures a level-playing field for all Cairn India shareholders,” said Cairn Energy India Plc.