Anil Agarwal has often said that he aspires to turn his Vedanta Group into an Indian version of Melbourne-headquartered BHP Billiton, a diversified natural resources company.
The first step towards this was in 2012-13 with the merger of Sesa Goa and Sterlite Industries. This was followed by bringing in top negotiator and Former Chief Executive of Rio Tinto, Tom Albanese, as Chief Executive Officer of Vedanta Resources Plc in March 2014.
Earlier this year, the Group restructured its foreign investment arm – Twin Star Holdings. And now, it proposes to merge Cairn India with Vedanta Ltd. The entire restructuring process is said to be Tom’s brainchild.
In conversation with BusinessLine, Tom agrees that the road ahead is not easy, while justifying how a diversified portfolio works to the advantage of all stakeholders: Edited experts:
Is this an opportunistic acquisition?
The timing is driven by our own presentations to shareholders and the market conditions. I have always said that in the second year of my stint as CEO, simplification of business will be on high priority.
I am aware that there are people who are saying that the decision is prompted by low oil prices. But, we all know that no one can speculate on oil prices. We heard just last week OPEC saying that oil would not go to the $100/ barrel levels. No one is saying there will be a rapid recovery of oil prices in the next two years. If anything, people are forecasting that oil prices could drop. So, it is not appropriate to say the trigger is oil prices.
But, there is also a perception that Vedanta wants to squeeze the last drop from Rajasthan assets, as there is a likelihood of the government not extending the contract for 10 more years after it expires in 2020…
Definitely not! From my own perspective, I am quite confident that in due course, with respect to the government’s decision, we will see a 10-year extension with no material change in terms. I can’t predict when that will happen. I think that the valuations that we would be using for the asset is for the life of the field till 2040.
When did work on the merger start? How soon will you start engaging with the minority investors, particularly LIC?
These are quite complex processes. It did take quite a bit of work. I had said in March 2015 at a capital markets day for Vedanta shareholders that simplification will be high on the agenda and the boards were looking at that.
Now, with the announcement, we can begin this. During the course of this week and over the next few months, there will be regular engagement with shareholders of Cairn India Ltd, Vedanta Ltd and Vedanta Resources Plc.
How did you arrive at the share consideration? How does it impact Vedanta Resource Plc’s ownership in Vedanta Ltd and will it impact the business?
There were a series of independent valuations done by valuers at Cairn India and Vedanta Ltd. Financial advisors were viewing those and giving their opinions to the boards of the two companies. The opinions were then reviewed by the investment banks, who gave their opinion, based on which the boards derived a fair share exchange value.
Vedanta Resources’ ownership in Vedanta Ltd will be diluted. From 62 per cent, it will come down to 50.1 per cent. From Vedanta Ltd’s perspective, in the near term, we will continue to focus on core businesses and expect to continue to generate positive cash flow. This is one of the benefits of having a diversified portfolio -- we have seen low oil and aluminium prices, but have also seen high zinc prices and reasonable copper prices.
The proposal to issue preferential shares is an advantage for Cairn India shareholders, but gives nothing to Vedanta’s investors. Do you think Vedanta’s shareholders have something to complain about?
Vedanta Ltd shareholders will also vote on this transaction. We think this is compelling from both sides. We see that Vedanta Ltd will have benefits of the simplification and I am confident that they will also find that this transaction has something for all.
What gives you the confidence that transaction will be completed by 2016? Are you sure of resolving the tax issues by then?
We expect the merger to be complete by 2016. We haven’t made any prognosis about the tax issue. I think it is one of those issues that have a dampening effect on the business.
I can’t speak for Cairn Energy Plc. They can’t sell their shares but they continue to have their voting rights. They will receive a share of Vedanta Ltd and a preference share which will be locked in. Again, I will suppose that they will not be able in a position to sell those.
Some analysts have given a negative to Cairn India citing the recent reduction in operating costs and fears of further cut after merger. Do you agree with this view?
We are committed to the oil and gas business. Cairn will continue to focus on expanding its oil production.
Now we are on track to bring the next generation of resource, which is going to be more difficult to produce as they are in tighter reservoirs, like the Barmer hill formations. This will require some of the best American technology. In light of the lower oil prices, we have better access to oil field service providers who are looking for work.
What we said is that we are not diminishing our growth plans but what we had to do was to use this weak oil price to make sure we are getting the most competitive oil field services for Rajasthan. We do want to bring down cost. And this will remain the case, with or without the merger.