The rumours have been making the rounds since early this year, but the buzz got louder this week. With reports suggesting that oil producer Cairn India may be merged with mining major Vedanta this Sunday in a major restructuring at the Vedanta Group, the stocks have been in the limelight. Vedanta has steadily gained more than 6 per cent since Monday, while Cairn India has been yo-yoing losing 4 per cent on Tuesday but recouping losses thereafter.
Win-lose The merger of cash-rich Cairn India with debt-heavy Vedanta, if it happens, will benefit the latter at the expense of the former. Here’s how.
Vedanta is saddled with huge debt – ₹36,800 crore on a standalone basis and ₹77,700 crore on a consolidated basis as of March. The company cannot count on paying down its debt through profits from its operations. Iron ore and copper prices are under tremendous pressure and are not expected to pick up this year. While aluminium prices are on a mend, there are operational issues with mining license availability. In the recent March quarter, Vedanta took a one-time charge of nearly ₹20,000 crore, mainly related to the acquisition of Cairn India. So, from a profit of ₹6,300 crore in 2013-14, the company was reduced to a loss of ₹15,600 crore in 2014-15. This has weakened the balance sheet further.
Cairn India is sitting on a lot of cash – ₹16,867 crore as on March. Vedanta after merging Cairn India with itself will have access to this cash to pare debt. While it has cash, there is little else going for Cairn India. The rout of crude oil last year took a heavy toll on the company - its consolidated revenue in 2014-15 was down about 22 per cent while profit was cut down two-third. The company has slashed capital expenditure — this will impact output growth. To add to the troubles, the taxman asked the company to cough up ₹20,495 crore for alleged failure to deduct tax on gains made by erstwhile parent Cairn Energy Plc. Now, if its cash is used to lighten Vedanta’s debt load instead of investing it to grow oil output in the future, a bad situation gets worse for Cairn India’s shareholders. Also, they will be exposed to a variety of commodity businesses rather than the pure oil and gas play they originally bet on. Besides, it will not help if the swap ratio for the merger is decided based on current share prices.
The Cairn India stock at ₹181 has lost more than half its value over the last year while the Vedanta stock at ₹188 is down 36 per cent. This could mean a swap ratio of about 1 share of Vedanta for 1 share of Cairn India, despite the latter having a much stronger balance sheet. But the merger may be easier said than done. For one, Cairn India’s minority shareholders while includes erstwhile parent Cairn Energy will likely oppose the merger. Then, there is ONGC, the joint venture partner in Cairn India’s mainstay Rajasthan asset, to contend with. Though it does not have voting rights in Cairn India, ONGC with government backing has the wherewithal to delay and even stall such merger moves, unless it sees value in it - as seen during the long-drawn sale process of Cairn India to the Vedanta Group in 2011. There is also the taxman’s sword hanging over the company – this may also prove a roadblock. So, while Vedanta may propose, many others may dispose. That’s perhaps why the Cairn India share recouped its losses this week.
While Cairn India’s merger may be on Vedanta’s cards immediately, there have been talks of also merging Hindustan Zinc. Hindustan Zinc too is sitting on a tidy cash pile of ₹30,785 crore as of March. The company is also doing well with profits increasing 18 per cent last year. Global zinc prices, though they have corrected lately, are robust. Price outlook from the International Lead & Zinc Study Group is positive.
Deal bottleneck The merger of Hindustan Zinc too faces roadblocks as the Government holds 29.5 stake. Vedanta, which owns the majority stake of 65 per cent, had made an offer to buy out the entire Government stake at around ₹170 per share. But the Centre may prefer an open market sale. So, there are uncertainties galore.
The boards of Vedanta and Cairn India are meeting on Sunday, June 14.