Vedanta, Cairn gain on new merger plans even as uncertainty lingers

Buoyed by the sweetened merger offer, both Vedanta and Cairn India stocks hit 52-week highs though there were mixed reactions to the proposed offer.

Shares of Vedanta touched a 52-week high of ₹175, but closed with a gain of 2 per cent at ₹171 on profit-booking. Similarly, Cairn India shares made a high of ₹207 and closed at ₹198, a gain of 3 per cent.

London-based industrialist Anil Agarwal-owned mining company Vedanta revised its offer to buy out minority shareholders of Cairn by giving one share of Vedanta for every one share they hold. The offer was also topped with four redeemable preference shares worth ₹10 each against the previous offer of one preferente share.

The preferential shares, which carry a coupon of 7.5 per cent, can be redeemed after 30 days or 18 months. The Indian metal baron will be distributing just $500 million or 15 per cent of the $2.9-billion reserves of Cairn India to its own shareholders at the end of March and use the remaining fund to retire Vedanta’s debt.

However, the deal cannot be sweetened any further by the promoter. Any increase in swap ratio will lead to the London-listed Vedanta Resources Plc’s holding fall below the crucial 50 per cent mark of the enlarged capital base.

According to the proposed merger, Vedanta Plc’s ownership in Vedanta will decrease to 50.1 per cent from 62.9 per cent, post-merger. Cairn India minority shareholders will own 20.2 per cent and Vedanta shareholders will have 29.7 per cent stake in the enlarged entity.

Questions are also being raised on the timing of the offer when oil prices are on a more slippery wicket than metals. Oil prices have declined 26 per cent since the first offer was made over a year ago while prices of commodities of Vedanta’s interest have fallen just 5.5 per cent in the same period. Notwithstanding the cash pile on its books and tax claims, the sharp decline puts the prospects of Cairn under bad light.

Sanjay Jain, Research Analyst, Motilal Oswal Securities, said the terms of the revised deal are better for Cairn shareholders given the additional redeemable preference shares. However, he said, some of the issues that need to be addressed include approvals by the Petroleum Ministry and FIPB besides unexpected opposition by minority shareholders and ability of Cairn Energy Plc to vote. The value of merger to Vedanta shareholders can change based on the contingent tax liability and terms of production sharing contract extension for the Barmer oil and gas field.

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