Merger with Vedanta: Will Cairn’s minority shareholders ink a raw deal?

On September 8, minority shareholders of commodity conglomerate Vedanta approved the proposed subsuming of oil arm Cairn India.

No surprises here as the debt-laden Vedanta clearly benefits by merging with itself its cash-rich subsidiary.

But will the minority shareholders of Cairn India play ball? That will be known at the shareholders’ meeting on Monday (September 12).

The merger, despite some recent improvement in the terms, still remains a raw deal for Cairn’s shareholders.

For the deal to go through, the majority of the company’s minority shareholders voting should give their go-ahead.

That is, there must be more votes in favour of the deal than those against it.

Minority shareholders hold 40.12 per cent in Cairn India, with erstwhile parent Cairn UK Holdings (9.83 per cent) and LIC of India (9.06 per cent) having the largest stakes.

Foreign portfolio investors hold 15.75 per cent, mutual funds and insurance companies about 1 per cent, and retail investors about 3.5 per cent. So, the votes of LIC and Cairn UK Holdings will be crucial in deciding the fate of the deal.

Reports are that LIC has given its nod. The original deal proposed in June 2015 — one share plus one redeemable preference share of ₹10 (with 7.5 per cent annual interest) of Vedanta for one share of Cairn India — had met with stiff resistance.

After holding out for more than a year, the management sweetened the deal this July. On offer now: for each share in Cairn India, one share plus four redeemable preference shares of ₹10 (with 7.5 per cent annual interest) of Vedanta.

The management said that this represented a 20 per cent premium to Cairn’s previous month stock price before the announcement.

But is this a good enough sweetener? Not quite, suggest some number checks.

A closer lookIn June 2015 , when the original deal was proposed, the implied premium to Cairn India’s shares based on its last traded price was about 7 per cent. The July 2016 proposal implies a premium of just about 9 per cent, based on its last traded price.

Crucially, now as then, shareholders of Cairn India have not been compensated for the $1.25-billion (about ₹8,400 crore) loan given by the company to a Vedanta subsidiary in May 2014.

This loan, given for two years, was rolled over for another two years in May 2016 on marginally higher interest rates, benchmarked to the Libor.

The funds could have yielded much better returns if deployed in India. The principal amount works out to about ₹45 per Cairn India share. On merger, the loan will get extinguished.

Cairn’s cash hoard of about ₹19,500 crore along with the loan to Vedanta arm translate to about ₹150 per Cairn India share. This implies a value of just about ₹60 a share to the core crude oil business that includes the prolific Rajasthan asset.

True, Cairn India is facing challenges due to the rout of oil over the past two years. Even so, the low implied value assigned to the business seems a raw deal.

A weak market that has weighed on the stock does not seem the best time to sell, especially when the business has the wherewithal to weather the tough times.

Also, concerns about the renewal of the asset lease in Rajasthan beyond 2020 seem to be getting sorted out with the Delhi High Court’s intervention.

Oil price, tax case If Cairn India’s minority shareholders accede to the deal, they probably will be influenced by the spectre of long-term weakness in crude oil. In such circumstances, a diversified commodity play under Vedanta would seem a hedge.

Also, the ₹20,495-crore tax case against Cairn India for alleged non-deduction of taxes during Cairn Energy’s restructuring in 2006, may nudge shareholders into saying yes to the merger. Even so, the minority shareholders could have bargained harder for much more.

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