Cairn India to exit investments in Anglo American ahead of schedule

The investment by CIHL, which was entered into as part of its cash management activities, has delivered a net gain of over $100 million

Following the redemption of the structured instrument, completed with due Board approvals, CIHL will have no further economic exposure to Anglo American plc shares

Cairn India Holdings (CIHL), Vedanta's wholly-owned subsidiary in the UK, will sell its investment in Anglo American Plc, a multinational mining firm. It will make a gain of $100 million within the eight months in which it was held, said Vedanta on Friday. 

This unwinding is linked to billionaire Anil Agarwal divesting a 19.3 per cent equity interest in Anglo American, which he owned since 2017. The investment was widely seen as a takeover attempt by Agarwal, but he chose to step away.

The complex-structured investment by CIHL was done along with Volcan Investments, a firm owned by Agarwal in his personal capacity. Agarwal stands to make $500 million in gains, but will pocket $200-$300 million after fees, Bloomberg reported from London.

"Our early exit from this investment structure is a prudent move as the rate of return stood at 70 per cent, which was higher than our expectation of a 10 per cent rate of return," informed the Vedanta management in the June quarter earnings call on Friday.

In December 2018, CIHL, as part of its cash management activities, purchased an economic interest in the equity shares of Anglo American Plc from Volcan Investments for Rs 3,812 crore. This was done through a structured investment. Under this structure, the ownership of the underlying shares remained with Volcan. This structure was supposed to mature in two tranches in April 2020 and October 2020. 

Volcan will exercise the early exchange option available to it on Friday. Consequently, the full exchange of its two issues of mandatory exchangeable bonds, secured by shares in Anglo American Plc, will be settled on August 12.

The share price of Anglo American has nearly doubled since Volcan invested in it, said Vedanta in its statement.

“The exit call was based on risk versus reward. There was zero pressure from anyone. The move has been made keeping all stakeholders' interest in mind,” clarified the management. 

Last year, upon its decision to enter the investment structure, Vedanta had attracted negative reaction from the market. Rating agency Moody's Investors Service lowered its outlook on Vedanta's parent company, Vedanta Resources, to negative from stable, citing the development as a 'credit negative'.  

Shares of Vedanta also declined close to 20 per cent over a couple of days after the announcement of this investment. 

“This was a one-off investment since we had surplus cash and an opportunity came our way around that time. We have no plans to make similar investments going ahead. After the exit from Anglo American, both Volcan and Vedanta have no stake in the former," said Srinivasan Venkatakrishnan, CEO, Vedanta. 

Shares ended 5 per cent lower from their previous close at Rs 164 apiece on the BSE on Friday. 

“Our strategy continues to focus on our existing businesses, where we believe that there are significant opportunities to unlock their full potential,” added Venkatakrishnan.

Following the redemption of the structured instrument, along with the necessary board approvals, CIHL will have no further exposure to Anglo American’s shares.

Deal dynamics

| After the exit by Volcan, Vedanta will hold no stake in Anglo American Plc
| Rate of return at time of exit stands at 70% 
| Vedanta has no plans to make similar investments going ahead
| Vedanta faced no pressure to exit investment structure