Vedanta-Cairn merger proposal: minority shareholders may fight it out, say analysts

The merger between Vedanta and Cairn India has not yet been confirmed by the company but analysts expect opposition from minority shareholders if the proposal is cleared by the companies at their next board meeting.

“Even a blind man can see that this is to access Cairn India’s cash reserves,” said JN Gupta, Managing Director, Stakeholders Empowerment Services, a shareholder advisory firm.

“Whether the merger will go through depends on how investors see it this time. I foresee Vedanta’s shareholders approving, not Cairn’s.”

To a query from stock exchanges on the speculation, the company said that its strategy is “to simplify and consolidate its corporate structure,” and that it would make appropriate disclosures when necessary.

At the end of March 2015, Vedanta had reported debt of ₹77,752 crore with an average borrowing rate of 7.9 per cent. Cash and liquid investments amounted to ₹46,212 crore. Cairn has cash reserves of ₹16,867 crore with no long-term debt weighing down its balance sheet.

Crude oil woes However, Cairn took a hit to its profitability last year because of the fall in global crude oil prices. The price of Cairn’s stock has nearly halved in the same period while Vedanta’s has fallen by over a third. Cairn’s minority shareholders may be unwilling to trade this in for a company saddled with debt.

Vedanta has a history of skirmishes with its minority shareholders, mostly merging the relatively low-debt companies with those with higher debt or its delisting attempts.

A capital market analyst, who did not want to be named, said this time around, the process is likely to be a lot more transparent than in the past. Vedanta recently acquired 4.98 per cent in Cairn through its unlisted subsidiary Twinstar Mauritius Holdings Ltd at ₹220 a share “This happened before the rumours of the merger started circulating. So the question is whether this acquisition augurs wells for their corporate governance practices,” the analyst said.

At the end of March, total promoter holding stood at nearly 60 per cent. Cairn’s two large minority shareholders are Edinburgh-based Cairn Plc (9.82 per cent) and LIC (9.06 per cent).

Gupta of the shareholder advisory believes Cairn Plc is most likely to vote in favour of Vedanta, while LIC’s vote would depend on what the government makes of the merger. Retail holding is at less than 3 per cent.

Divided house “This time again I think the minority shareholder community will be divided,” Gupta said. “One positive is that now we have rules for related-party transactions in place. But I don’t know how things will pan out. We will oppose the merger but we will have to wait till the two companies announce the details.” Vedanta and Cairn are scheduled to meet over the weekend. So, the details of the merger should be public by next week.

COMMENT NOW