After two years of negotiations with minority shareholders, facing regulatory hurdles and a lingering Rs 30,000-crore (together with penalty) retrospective tax points, the merger of cash-rich Cairn India with Vedanta is lastly accomplished. The merger – a $2.Three billion all-share deal — will consolidate Vedanta’s position as one of many world’s largest diversified natural resources firms like BHP Billiton and Rio Tinto and the merged entity can have a professional forma market cap of $15.6 billion. The merger will assist Vedanta Assets cut back its debt. At the time of the merger talks, Cairn had cash and money equivalents of about Rs 25,000 crore, whereas Vedanta had about Rs 78,000 crore of debt.
The company has mounted April 27 as the report date for determining the checklist of the shareholders of Cairn India to whom the fairness and desire shares of Vedanta Ltd (earlier known as Sesa Sterlite) will likely be allotted. As determined throughout the merger, for each equity share held in Cairn India, buyers will obtain one equity share and 4 redeemable choice shares in Vedanta. Also, Cairn India shareholders will turn out to be shareholders of Vedanta and can obtain an interim dividend of Rs 17.7 per equity share as authorized by the board of Vedanta on March 30, 2017.
Resistance for the deal
The deal faced stiff resistance from Cairn India shareholders including Life Insurance coverage Corporation of India (LIC), which has 9% stake in the corporate. As a way to sweeten the deal, Vedanta and Cairn had introduced a revised deal, or a sweetener, in July last year through which Vedanta supplied minority shareholders of Cairn India one equity share and four redeemable choice shares with a face value of Rs 10 each. The choice shares will carry a coupon of 7.5% and tenure of 18 months. The revised deal implied a 20% premium to the one-month volume weighted common worth of Cairn shares. The sooner deal in 2015 was one equity share and one redeemable desire share.
With the merger, the minority shareholders of Cairn India will hold a 20.2% stake in the merged entity, while Vedanta Plc’s ownership will probably be 50.1% and the remaining 29.7% might be owned by Vedanta’s minority shareholders. With the ultimate restructuring, Vedanta Sources will keep majority management of Cairn India whereas getting higher entry to the money on the steadiness sheet. There was resistance from Cairn shareholders that Vedanta will use the former’s money reserve to pare debt. Even though Vedanta administration led by London-based mostly billionaire Anil Agarwal has assured that it will not use Cairn’s money pile to repay debt, the very fact remains that cash is fungible, especially as soon as the steadiness sheets of the 2 firms are merged and aligned.
Additionally, the Cairn-Vedanta merger concerned the switch of petroleum mining rights in addition to production sharing contracts for the Rajasthan and other home exploration and production blocks, which required consent from the government as properly because the JV accomplice – Oil and Natural Fuel Company Ltd. In actual fact, in 2011, Vedanta Group acquired fifty eight.5% controlling curiosity in Cairn India from its UK father or mother, Cairn Energy Plc. Of this, 20% was acquired by Vedanta Ltd and 38.5% by Twinstar Mauritius Holdings, Ltd, which is a particular purpose car wholly owned by Vedanta Resources Plc. The acquisition by TMHL was funded by $four.Forty three billion of debt funded partly by banks and by Cairn India. The deal received locked in a dispute with the federal government over the payment of royalty. Later the government gave conditional approval to the deal provided Cairn India handled royalty as a value recoverable merchandise, withdraw all arbitration proceedings and acquire a no-objection certificate from Oil and Pure Gasoline Corporation Ltd.
What the deal means to Vedanta and Cairn India
For Vedanta, the merger will simplify the group construction, de-risk earnings volatility and allow flexibility to allocate capital. Cairn India’s cash balance of Rs 2,500 crore will assist in rationalizing Vedanta’s enormous debt burden and reduce value of funding. Also, after the merger, a loan of Rs eight,000 crore given by Cairn India to Vedanta will be waived.
Vedanta’s debt points were attributable to regulatory hurdles and weak commodity costs, which hit the money-flows of group companies. The gloomy macroeconomic setting for the commodities market as a result of sharp decline in commodity prices has had a destructive impression on the net income of Vedanta. For Cairn, the merger will help it to withstand commodity price shocks as in a volatile worth atmosphere, a stronger balance sheet can manage cash flows very nicely. The merger will even make Vedanta Sources less advanced, with its subsidiaries coming right down to four from nine in 2011.
So far as Cairn India is worried, the deal will help it to diversify earnings from oil and fuel to electricity and an array of commodities from copper to zinc to aluminum. The shareholders of Cairn India will also gain from Vedanta’s asset base and output enhance forecast compared with Cairn India’s reasonable output growth plan. Factoring within the preference share issue and dividend payout to Cairn’s shareholders, the merged entity is buying and selling virtually at par with Vedanta’s current inventory price.
For each the businesses, the merger is a win-win resolution. Whereas Vedanta gets Cairn India’s cash reserves to pare its debt, Cairn India’s shareholders will benefit from Vedanta’s price-saving plan or advertising and marketing and procurement benefits. The merged entity may have a diversified product portfolio, which is able to allow Cairn India to overcome the cyclical downturn of oil prices and end in stable money flows for it and it will even get access to Vedanta’s low-value, longer lifecycle belongings. Put up-merger, the robust stability sheet will enhance the credit rating of the mixed entity, which will then present an opportunity for refinancing.
Globally, such an analogous merger to create an integrated natural sources player is uncommon. For instance, BHP Billiton, which is the largest built-in natural assets participant on the planet, entered into the shale gasoline enterprise in 2011 by buying Petrohawk. Similarly, Freeport-McMoRan, one among the largest copper producing firms on this planet hived off its oil enterprise into a separate company in 1994. But in December 2012, the company merged its oil enterprise and acquired one other oil exploration firm to replicate the BHP Billiton model. In some ways, the merger of Vedanta and Cairn India is one like that to create a global conglomerate.
It is an independent oil and gas exploration firm, owned by Vedanta Group, having taken over from Cairn Energy, UK. Cairn has stakes within the oil producing blocks – 70% in Rajasthan RJ-ON90/1, 22.5% in Revva and forty% in Cambay block CB-OS/2.In its largest field in Rajasthan, the company estimates gross proved and possible reserves and sources at 1.3 bn barrel of oil equivalent (boe) and gross recoverable risked prospective sources of 530 mmboe. Additional, it has exploration potential in blocks in KG onshore and Sri Lanka, the place it has made discoveries.
It is a subsidiary of Vedanta Assets, the London-listed metals and mining group. Vedanta is a globally leading diversified assets company with presence in oil and gasoline (although fifty eight.9% stake in Cairn India, and now a merged entity), zinc-lead-silver (through sixty four.9% stake in Hindustan Zinc Ltd and 1005 stake in erstwhile zinc-lead business of Anglo American), copper, iron, ore, aluminum and commercial power, largely in standalone business but in subsidiaries as effectively. It has a 2,four hundred MW power plant in Orissa and is in the midst of adding one other 1,980 MW capacity in Punjab.
The corporate was formed through the merger of Sterlite Industries into Sesa Goa together with the acquisition of extra 38.8% stake in Cairn in August 2013. Vedanta has entered the nonferrous metals sector as a pure-play copper producer and by several strategic acquisitions acquired aluminum as well as zinc-lead assets. The corporate has iron and ore mining assets in Goa and Karnataka with reserves of around 433 mt.
Though its subsidiaries, Vedanta Plc has operations throughout India, Zambia, Namibia, South Africa, Liberia, Eire and Australia. It was listed on the London Stock Trade in 2003 and would be the dad or mum of the merged entity – Vedanta – after merge with Cairn India.
With the merger has been down, the merger entity should chalk out its enlargement plan in India and other parts of the world. Because the merged entity can now get funds as a decrease cost from lenders, it could negotiate to amass the residual stake in authorities-owned Hindustan Zinc and Balco. The pricing should be negotiated and the buyoff will benefit Vedanta Group in the long-run.