Almost 16 months of protracted wrangling between Cairn Energy, ONGC, and Petroleum Ministry ended today with Vedanta Resources Plc completing its acquisition of Cairn India.
Mines and metals entrepreneur Mr Anil Agarwal's Vedanta Group has acquired a 58.5 per cent stake in Cairn India for $8.67 billion, the two companies said on Thursday. It has ended a period of uncertainty for Cairn India, which was caught in the crossfire as ONGC and Cairn Energy sorted out the issue of royalty payment for the premium Rajasthan oilfields.
Though both companies gave assurances that the deal would be completed in December, many feared that the dispute would carryon into the New Year.
Vedanta Resources Plc now holds 38.5 per cent in Cairn India, and its subsidiary, Sesa Goa Ltd, holds 20 per cent. Cairn Energy will retain 22 per cent, 10 per cent are with institutions, 2.7 per cent with retail investors and the balance with FIIs.
It gives the Vedanta Group its first inroad into the oil and gas sector in India.
Mr Agarwal said, “Cairn India possesses an enviable talent pool and we welcome them to the Vedanta family. We firmly believe that Cairn India has the potential to double its current capacity and we will work together to achieve it.”
Cairn India has said it could raise production from Rajasthan to around 240,000 barrels a day from a current level of around 125,000. Mr Rahul Dhir, Managing Director and CEO of Cairn India, said that they expected to exit the current financial year ending in March at a level of 175,000 barrels per day.
Funding
Vedanta said that 50 per cent of the transaction had been funded from its own resources. “We did not use the $1-billion bridge to equity facility we had taken originally to complete the transaction,” said Mr Navin Agarwal, Deputy Executive Chairman of the Vedanta Group during a conference call. Pro forma gearing remained well below the 40 per cent maximum threshold it had set itself. However, as a result of the transaction, the company expected to be in a net debt position for the next two to three years.
“This acquisition will be immediately earning accretive for all shareholders,” he added.
Royalty payments
The Vedanta Group acquired its stake in two tranches: the first 10 per cent sale took place in July, while the second 30 per cent was contingent on ONGC approval. ONGC only gave its consent to the deal, after Cairn Energy and Vedanta reached an agreement on royalty and cess conditions.
Under the terms of the original agreement, ONGC had been responsible for all royalty payments for the Rajasthan oilfields. Under the new terms, Cairn India will bear 70 per cent of the royalty payments – expected to amount to about 15 per cent of revenues — and has agreed to withdraw arbitration over a tax dispute. In October, it estimated that its cumulative royalty payments up till the end of September totalled $545 million.
Cairn Energy said it would be returning $3.5 million from the proceeds of the deal to its shareholders. Its share price has been under pressure over the past month as its exploration in Greenland has so far failed to result in commercially viable quantities of oil and gas.
The shares of Vedanta Resources were up 0.5 per cent at £11.04 in London on Thursday afternoon, while Cairn Energy shares also rose 0.5 per cent. The shares of Cairn India closed down 3.74 per cent at Rs 310.30 on the Bombay Stock Exchange on Thursday.