Cairn India: Mixed reactions

The $9-billion acquisition by Vedanta raises several questions, but the current shareholders are likely to benefit.

The $9-billion acquisition of a 40-51 per cent stake in Cairn India by Vedanta and its group company, Sesa Goa, and the possibility of a 20 per cent open offer at Rs 355 per share has evoked mixed reactions. From an investor point of view, the open offer can be a good time to exit, as the rate of Rs 355 a share is at a premium to the current price of Rs 322.

However, minority shareholders will get a raw deal, as promoters will get a no-compete premium of Rs 50 per share and, therefore, will get Rs 405 per share. The management holds that Cairn promoters may compete with the current company, but analysts reckon this is rather farfetched, as customers in the oil business are not as fickle as those in the retail business. Hence, the no-compete premium is not justified.

Shareholders in Sesa Goa could also get a raw deal, as the assets of Cairn, at the enterprise value to reserves, have been valued around $23 per barrel, much higher than the $14-17 norm for exploration and production assets around the world. Sesa Goa would be spending almost all its cash reserves (around Rs 13,000) crore for this unrelated and seemingly expensive acquisition. No wonder its share price tumbled 8.9 per cent on Monday. The management holds the price its paid for this ‘world class’ asset is justified.

Analysts say in the Rajasthan reserves, Cairn has in-place reserves of 1.9 bnboe (billion barrels of oil equivalent) while the management has guided a nine per cent recovery. “However, the deal valuation implies a recovery rate of nearly 40 per cent,” say analysts at Elara Capital. While these rates are achievable, analysts believe there is still enough exploration work left before higher recovery estimates can come into the picture. “Thus, we do not see the recovery guidance going up to 40 per cent in the next 12 months,” they add. Hence, valuations look expensive from a 12-month perspective.