Anil Agarwal-led Vedanta Resources Plc's proposed plans to merge cash rich Cairn India with its debt heavy mining & metals arm Vedanta Ltd now faces a challenge as at least one of the minority institutional investors has voiced concerns over the prospective gains from the move.
Aviva Investors, an asset management arm of insurer Aviva Plc which owns a stake in Cairn India and is the largest minority investor in Cairn Energy, former promoter and a key shareholder of Cairn India, has said the proposed merger would not deliver sufficient value.
“As long-term investors, we believe that the timing of this deal is opportunistic and materially undervalues Cairn India, its current reserves and future prospects," Aviva Investors has said.
"We are also concerned there is a risk of the Vedanta Group misallocating capital should its integration of Cairn India prove successful...with high levels of debt and an aggressive capital expenditure programme, we fear the Vedanta Group would prioritise its immediate needs over the long-term potential we believe exists at Cairn India,” it added.
Although Vedanta Group owns majority stake in Cairn India, it needs the approval of a good number of voting public shareholders to see through the merger.
In a major consolidation move, London Stock Exchange-listed Vedanta Resources decided to merge Cairn India with its flagship but debt heavy Indian arm Vedanta Ltd (formerly Sesa Sterlite) in June this year in a whopping $2.3 billion deal.
While Vedanta Ltd is primarily known as a mining and power firm, Cairn India is into oil space. Cairn India is already part owned by Vedanta Ltd. Coupled with London-listed parent's stake, it is majority owned by Vedanta as a group.
Under the proposal, minority shareholders of Cairn India will receive one equity share and one redeemable preference share of Vedanta Ltd for every share they hold in Cairn India.
The preference shares carrying coupon rate of 7.5 per cent per annum payable annually at the end of each financial year. It would have a tenure of 18 months from issuance and at the end of the period Vedanta Ltd will arrange for a third party facility enabling a cash exit for the preference shareholders at par (Rs 10 a preference share).
The deal would lead to issue of approximately 752 million equity shares and equal number of preference shares to the minority shareholders of Cairn India. Vedanta as a group already owns over 59 per cent stake in Cairn India and its holding would not be converted into treasury shares.
This would peg the overall deal value at Rs 14,842 crore ($2.3 billion), based on the closing share price of Vedanta at the time of announcement.
With this transaction, Vedanta Resources' stake in Vedanta Ltd is expected to decrease to 50.1 per cent from 62.9 per cent currently. Cairn India's minority shareholders will own 20.2 per cent and Vedanta Ltd minority shareholders will own 29.7 per cent stake in the enlarged entity.
Meanwhile, Vedanta maintained that its offer is fair and that it was engaging with minority shareholders.
The vote on the merger will take place in the last quarter of this year and until then we will continue to engage with all shareholders, it added.