Scrapping non-compete fee, a sweetener for Vedanta

The latest agreement between Cairn Energy and Vedanta to jettison the non-compete provision and related fee (Rs 50 per share) in the Cairn India acquisition deal seems to be a tacit acknowledgement of the writing on the wall. That the deal as originally envisaged would need to be tweaked was an almost foregone conclusion. This was after a ministerial panel reportedly recommended that royalties paid by ONGC be made cost-recoverable. Both Cairn Energy and Vedanta were strongly opposed to such a pre-condition, given that it would result in a sharp hit in profits and valuation of Cairn India. The move to scrap the non-compete fee could hence be seen as a deal sweetener offered by Cairn Energy to Vedanta. This is not surprising, given that Vedanta's original offer of Rs 405 per Cairn India share to Cairn Energy may not have factored in the possibility on the royalty liability devolving on Cairn India too.

Interestingly, the latest deal provides for a two-tranche sale of 40 per cent in Cairn India – 10 per cent in the first tranche on or before July 11 (ostensibly without requiring government approval since Cairn Energy would still hold majority 52.2 per cent), and the second tranche of 30 per cent after receipt of necessary government approvals. This deal structuring seems to be aimed at securing a position of influence for Vedanta in Cairn India irrespective of the final government decision on the deal, or the time taken to arrive at the decision. At present, Vedanta through its subsidiary Sesa Goa has 18.5 per cent stake in Cairn India (8.1 per cent acquired in the open offer to minority shareholders, and 10.4 per cent acquired from Petronas). With the additional 10 per cent stake in the first tranche, Vedanta's effective holding in Cairn India would go up to 28.5 per cent. This would make Cairn India an associate company of Vedanta (more than 20 per cent stake) and allow the latter to account for a proportionate share of the former's profits. Also, by holding in excess of 26 per cent, Vedanta would acquire a say in key decisions of Cairn India and could stake claim for representation on its board. On its part, Cairn Energy also benefits (albeit to a lesser extent than originally planned) by being able to quickly monetise its asset, at least in piecemeal. Also, with the non-compete arrangement out of the way, Cairn Energy would be free to carry out its activities in the Indian sub-continent, if and when the deal finally culminates.

Market not pleased

The markets however did not seem pleased by the scrapping of the non-compete fee. This move seems to have been interpreted as increasing the likelihood of Cairn India resigning itself to bear the royalty burden, going forward. The stock lost around 0.6 per cent in Tuesday's trade, compared with the 0.4 per cent rise in the Sensex. The Cairn India stock has been losing ground over the past month primarily on concerns over the royalty issue.

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