Vedanta to pay billions for Cairn stake
MUMBAI, India (AP) - Vedanta Resources Plc has agreed to pay $8.5 billion to $9.6 billion for a 51 percent to 60 percent stake in the India unit of Britain's Cairn Energy Plc, the companies said Monday.
The transaction is London-listed Vedanta's first foray into oil and gas and would give the mining giant access to India's fast-growing oil and gas sector. For Cairn, the deal frees up cash to return to shareholders and to fund further exploration in Greenland.
"The proposed acquisition significantly enhances Vedanta's position as a natural resources champion in India," Vedanta executive chairman Anil Agarwal said in a statement.
Analysts questioned whether Vedanta - which is following BHP Billiton's footsteps in diversifying from mining to hydrocarbons - has the expertise required to fully exploit Cairn's India holdings. Some said the deal structure penalized minority shareholders.
Cairn India is the nation's largest foreign oil and gas company, with a market capitalization of $14 billion, and produces 125,000 barrels of oil a day from fields in the northern state of Rajasthan.
Vedanta said it believes it can more than double output from those fields, which contain an estimated 6.5 billion barrels of oil and gas equivalent, plus the possibility of an additional 250 million barrels more.
India imports more than two thirds of its oil and imports are forecast to grow at 5.4 percent a year through 2015. If Vedanta is able to double production, as planned, it would account for a quarter of the nation's total oil output, by the company's own calculations.
Vedanta will buy a 40-51 percent stake directly from Cairn and acquire the balance of shares on the open market, per Indian securities regulations.
If the deal goes as planned, Cairn Energy's stake in Cairn India would drop from 62.4 percent to between 10.6 percent and 21.6 percent. Vedanta Resources would hold 31 percent to 40 percent of Cairn India directly and its subsidiary Sesa Goa Ltd. would hold 20 percent.
"What Cairn Plc is known for is its deep knowledge in upstream exploration," said IIFL Capital analyst Bhaskar Chakraborty. "They have gone and taken up blocks others have relinquished thinking there is not enough potential, then they made the discoveries commercial and sold them off."
Case in point? The Rajasthan fields, which Cairn Plc snapped up from Anglo-Dutch giant Shell in 2002 for a relative pittance.
"Shell made the first discovery, but came to the conclusion it was so small it could not be commercially exploitable," Chakraborty said. "When they were giving it away, they thought it was a useless field."
Vedanta, he said, doesn't have any oil and gas expertise. Whether Cairn Plc's residual ownership interest in Cairn India will be enough to encourage it to pass on its know-how to Vedanta - thus spawning a potentially powerful rival - remains to be seen.
"Will the Indian business have the skills necessary to exploit the Rajasthani block as well as it would have had Cairn Plc continued to be the parent?" Chakraborty said.
The deal was pushed through in just three weeks, a haste that Chakraborty said might have to do with a desire to avoid new securities norms expected to come into force in the next 60 days to prevent different offer prices for minority shareholders.
Vedanta is offering regular investors 355 rupees a share - 6.7 percent more than the stocks' closing price on Aug. 11, when rumors of a deal surfaced - but offering Cairn India a 50 rupee per share "non-compete fee" on top of that, or 22 percent more than the Aug. 11 price.
"The 50 rupee premium came as a big negative shock," Chakraborty said.
The companies said they expect the transaction to close in the first quarter of 2011.
Cairn India shares briefly spiked to a 52-week high on the news before tumbling to close down 6.4 percent, at 332.9 rupees a share in an otherwise flat Bombay Stock Exchange.
Vedanta shares were up 4 percent at 2,136 pence ($33.26), while Cairn Energy shares gained 3 percent to 482.8 pence ($7.51) in morning trade on the London Stock Exchange.
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AP Business Writer Jane Wardell contributed to this report from London.
Copyright 2010 The Associated Press.
