A slippery deal

Vedanta: Investors are being squeezed in Vedanta’s deal to buy a controlling stake in Cairn India. The miner controlled by ambitious Indian billionaire Anil Agarwal will spend as much as $9.6 billion – more than Vedanta’s own market capitalisation – to purchase up to 60 per cent of the Indian oil producer. Yet the London-listed miner’s complicated leap into the oil industry serves mainly as a reminder of the risks faced by minority investors in public companies.

To avoid diluting its controlling family’s 61 per cent shareholding, Vedanta is conducting part of the acquisition through its Indian-listed iron ore subsidiary Sesa Goa. The unit, 57 per cent owned by Vedanta, will make a public tender offer for 20 per cent of Cairn India shares at '355 per share and fund the $2.9 billion cost from its existing cash reserves.

Vedanta will then make up the difference by buying between 40 and 51 per cent of Cairn India from Cairn Energy at '405 per share. This part of the acquisition, which will cost between $6.6 and $8.4 billion, will be funded with bank facilities provided by a consortium of lenders led by Standard Chartered.

It’s a punchy acquisition, lacking any apparent financial synergies, for a firm that has no experience in the oil industry. True, the debt looks manageable: Vedanta’s consolidated group net debt will be less than two times Ebitda by March 2011, according to bankers. And the company still plans to invest $10 billion in its operations over the next three years.

But that doesn't make the deal any easier to swallow for minority shareholders wary of Vedanta’s Indian empire building. Investors in Sesa Goa will be particularly bemused to see all of the iron ore firm’s cash suddenly invested into oil. Even so, the family’s shareholding is sufficiently large to make approval at both the subsidiary and parent company levels a foregone conclusion.

Minority shareholders in Cairn India are not faring any better. They are being offered a measly 12 per cent premium to the undisturbed share price, while majority shareholder Cairn Energy is receiving a 22 per cent premium, dressed up as a non-compete agreement.

Indeed, it is difficult to see what the deal brings to Vedanta that shareholders could not have achieved themselves buying shares in the open market. Until Vedanta can demonstrate this clearly, the only real winner is Cairn Energy.