London Stock Exchange listed Vedanta Resources on Sunday announced an all-stock deal, worth $2.3 billion to minority shareholders, to merge its Indian units Vedanta Ltd and Cairn India Ltd.
The debt-heavy mining and metals company Vedanta Ltd currently owns a 60 per cent stake in cash-rich oil and gas explorer Cairn India.
The deal is expected to be completed by March 31, 2016. After the merger is completed, parent Vedanta Resources Plc’s holding in Vedanta Ltd will drop to 50.1 per cent from 62.9 per cent.
Cairn India’s minority shareholders will have a 20.2 per cent stake and Vedanta Ltd’s minority shareholders will own 29.7 per cent in the combined entity.
As part of the merger, minority shareholders of Cairn India, including LIC, will receive one equity share in Vedanta for each equity share they hold and one redeemable preference share in Vedanta Ltd with a face value of ₹10 and an assured dividend of 7.5 per cent per annum. The preference share will have a tenure of 18 months, after which it will be redeemed for cash at face value.
The effective swap ratio, including the preference share, is 1:1.04.
The company says this reflects an implied premium of 7.3 per cent to Cairn’s shareholders based on Friday’s closing price. The transaction will be tax neutral for both the company and the shareholders.
“The driving force behind the merger is simplification of businesses of Vedanta Resources Plc and to achieve economies of scale in the businesses each company operates,” said Tom Albanese, CEO of Vedanta Resources Plc, at a press conference. The merged entity, intended to be the country’s largest natural resources company, will have a topline of ₹80,000 crore and an EBITDA of ₹22,226 crore per annum. The net debt on books of the merged entity will amount to ₹31,540 crore because a $1.25 billion loan given by Cairn India to Vedanta Ltd last year will get absorbed in the deal.
The hurdles There could, however, be two significant hurdles in consummating the deal. Analysts had earlier said that minority shareholders in Cairn may find the deal unfavourable because of concerns over Vedanta using Cairn’s cash reserves to repay debt. Vedanta Ltd currently has debt of ₹37,636 crore while debt-free Cairn India has cash reserves of over ₹16,800 crore.
Allaying shareholder concerns, Albanese said the company had already made arrangements to refinance its debt. He said, Vedanta has already refinanced $400 million this year and is in talks to refinance $2 billion payable next year. He added that investors in Cairn India stand to benefit from Vedanta’s recent investments in the metals and mining space.
“We will soon be engaging with LIC and Cairn Plc, the largest minority shareholders in Cairn India, who hold about 20 per cent together, to seek their approval,” Albanese added.
The other concern could be around the Income Tax Department’s freeze on the 9.2 per cent shareholding of Cairn Plc in Cairn India. “The freeze will still continue but it will be replaced with Vedanta shares,” said Albanese.
With regard to operational synergy, the transaction would contribute to further the streamlining of internal processes and improve productivity beyond the previously announced $1.3 billion through a marketing and procurement cost saving programme, he added.
The company feels the merger will not affect the renewal of operating licences at its flagship oil producing field in Barmer, Rajasthan. The licence is up for renewal in 2020. Albanese ruled out the possibility of any retrenchment arising from the merger. There will also be no change in Cairn’s top management, he added.