Why Cairn’s minority shareholders should vote against the merger

By this time next year, Cairn India would have been subsumed into Vedanta. Unless, of course, the minority shareholders give the proposed deal a thumbs down.

For the merger to go through, a majority of the minority shareholders who vote on the proposal have to approve it. The minority shareholding in Cairn India as on March 2015 is 40.12 per cent.

If all the minority shareholders vote, then those with more than 20.06 per cent stake have to give their go-ahead for the deal to pass muster.

But if say, minority shareholders with only 30 per cent stake vote, then the deal will go through if those with just a little over 15 per cent approve it.

So, if you, as a minority shareholder in Cairn India are opposed to its merger with Vedanta, vote and make your voice heard. Here are four reasons why minority shareholders of Cairn India may want to say no to the merger:

Cairn India is sitting on a lot of cash, ₹16,867 crore as on March 2015, and despite the management spiel about synergies, this is the big trophy that debt-heavy Vedanta’s promoters seem to be eyeing.

It’s not just about the cash though. In the June quarter last year, the company lent $1.25 billion (about ₹ 8,000 crore) to a subsidiary of Vedanta. After the merger, this loan will get absorbed in Vedanta.

So, Cairn India’s minority shareholders can kiss it or at least most of it goodbye, since they will own just 20.2 per cent in the merged entity.

The cash and loan together make up about ₹133 per share of Cairn India. That’s nearly 71 per cent of the current share price of ₹188. Sure, the company is passing through a rough patch now with low oil prices. But to assign just about ₹55 a share to a business which includes the prolific Rajasthan asset seems a raw deal.

Cairn India’s minority shareholders invested in a pure oil and gas play. If they wanted exposure to other commodities, they had the choice of placing their bets in other companies including BHP Billiton (Indian laws allows investment in foreign stocks) or even Vedanta. Cairn India’s shareholders would have been better off using the cash to buy out global oil and gas assets available cheap due to the rout of crude oil.

The shareholders will get a preference share in Vedanta which will be redeemed at its face value of ₹10. This is an apology of a sweetener at best and does not alter the unfavourable nature of the deal. The coupon rate of 7.5 per cent on the preference share is a pittance, lower than what banks offer on their deposits.

The assertion by Vedanta’s management that the transaction is not opportunistic does not fly. At possibly the lowest point for the company, Cairn India’s minority shareholders are being solicited to enter a deal that works against them.

The rout of crude oil, the poor corporate governance at the company evidenced in the unfavourable loan terms last year, and the recent massive write-off of goodwill at Vedanta pertaining to its investment in Cairn India combined to drag down the latter’s stock price by more than 50 per cent last year.

The pain was worsened by reports of the impending merger proposal. At the depressed stock price, 1 share of Vedanta for 1 share of Cairn is akin to a distress sale, even with the ₹10 preference share appendage.

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