Ever since the news of the Cairn-Vedanta merger started doing the rounds of business circles and among the helpless retail investor community, analysts and specialists have offered a wide range of perspectives on matters ranging from valuation to regulation.
Need for the Deal
From Vedanta’s Perspective
Vedanta’s strategy is to become a world-class metals and mining organisation, adopting four approaches:
— Asset streamlining and expense reduction
— Credit limit extension
— Solidifying its holdings
— Looking for acquisitions
— By purchasing a stake in Cairn India, it will diversify into the oil and gas sector.
— The company believes it can gain a superior quantifiable profit than the business rate of return in the long term.
— The merger could improve Vedanta’s capital resources: When the mining division’s benefits decrease because of higher energy costs, the exploration division’s benefits will go up as Cairn has a fruitful exploration business that is being scaled up, next to nil net obligation and positive cash-flows.
From Cairn’s perspective
Cairn India will be able to use Vedanta’s core skills of project management and development of reserves and resources.
Cairn Energy Ltd needs cash for exploration in Greenland.
Cairn India shareholders will get access to low-cost, longer-life assets and a diversified product portfolio, which can help the company ride the cyclical downturn of oil prices, and lead to stable cash flows.
Issues affecting the merger
Funding for the proposed transaction: Huge acquisition cost of $8.67 billion (around ₹44,910 crore today).
Significant increase in debt after the transaction.
Credit rating agencies have downgraded Vedanta, as the firm plans to borrow to finance the acquisition.
Fitch Ratings downgraded Vedanta’s rating from ‘BBB-’ to ‘BB+’
Cairn has also signed a production sharing contract (PSC) with the Indian Government for an oil exploration block, which would need the government’s approval if some stake in the field or the company were sold.
Majority of the Minority Rule
According to SEBI regulations, for such a merger proposition to be affirmed, votes cast by open shareholders (i.e. shareholders other than the promoters) for the proposition must be no less than two times the quantity of votes cast against it. Basically, for such a merger to succeed , open shareholders of both organisations should ideally support the merger.
According to the most recent shareholding pattern of Cairn India, the promoters and promoter gathering hold 59.89 per cent shareholding of the organisation.
Of the remaining 40.11 per cent open shareholding, Cairn UK (the recent promoters) holds 9.82 per cent and Life Insurance Corporation of India (LIC) holds another 9.33 per cent. Other than these two minority partners, retail investors hold about 20 per cent.
Naturally, the assent of one, if not both, of these minority partners will be expected to push the merger through. With a majority of the Cairn minority shareholders (holding 40 per cent equity) required to approve this merger, there is a risk of institutional investors’ delaying the process. This could impact sentiment.
Opinion
The deal will help Vedanta Ltd to finance its portfolio of assets, allocate capital to its highest-return projects, and sustain a strong dividend programme. There is an apparent benefit for parent Vedanta Resources when it needs support to service its huge debt, and Cairn shareholders are clearly worried about a raid on their substantial liquid assets.
Other Benefits for Vedanta
Its position in India after the merger: Cairn India has vast experience in exploring, discovering and operating production assets in India for many years with ONGC, the Indian Government, State governments, regulators and key industry participants.
Development and operational expertise: Cairn India has a proven track record of developing resources at low cost in the oil and gas sector.
Vedanta’s position will be stronger: Vedanta intensifies its position in Rajasthan in the private core sector by getting into the energy portfolio along with Zinc.
(Ankit Kumar Gupta, a student of PDGM 2014-16 at Goa Institute of Management, is the third runner-up in the case study contest)