London-listed mines and energy company Vedanta Resources Plc moved to merge cash rich oil unit Cairn India Ltd with its flagship but debt heavy Indian arm Vedanta Ltd (formerly Sesa Sterlite), with the boards of the respective firms agreeing to the proposal during the weekend.
The deal consolidates much of Vedanta Resources business in India under one roof. In 2013, it had merged Sterlite Industries with Sesa Goa.
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.
In 2011, London Stock Exchange-listed Vedanta Resources had inked a deal to buy UK's Cairn Energy's controlling stake in Cairn India for $8.67 billion.
The independent directors of the boards of all three firms have approved the merger.
The deal, which is now subject to several approvals, would allow the group to cut down its debt by utilising the cash pile of Cairn India.
The transaction is expected to close in Q1 of 2016.
Anil Agarwal, chairman of Vedanta Resources, said: “This marks a significant step towards achieving our stated long term vision of a simplified group structure with alignment of interests between all shareholders for the creation of long term sustainable value.”
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 on Friday.
Meanwhile, Vedanta Resources stake in Vedanta Ltd is expected to decrease to 50.1 per cent from 62.9 per cent currently. Cairn India minority shareholders will own 20.2 per cent and Vedanta Ltd minority shareholders will own 29.7 per cent stake in the enlarged entity
The transaction is expected to be tax-neutral for Vedanta Ltd, Cairn India and their shareholders.
Vedanta Ltd would further consider consolidation of some of its wholly owned foreign subsidiaries as part of a larger group restructuring, it said.
Tom Albanese, CEO of Vedanta Ltd, said: “This transaction consolidates our portfolio of Tier-I assets which, combined with strong management, will deliver superior returns for all shareholders. It will result in improved financial flexibility to allocate capital to the highest return projects and sustain strong dividends.”
Vedanta Resources said that from a group perspective, the deal diversifies tier-I portfolio and de-risks earnings volatility and drives stable cash flows through the cycle.
It added that the transaction will contribute to further the streamlining of internal processes and improved productivity, beyond the previously announced $1.3 billion.
“Stronger balance sheet will allow for the overall cost of capital to be reduced,” Vedanta Ltd said adding that it is consistent with stated corporate strategy to simplify the group structure.
Mayank Ashar, CEO of Cairn India, said: “The merger with Vedanta Limited will generate additional value for our shareholders and derisks Cairn India by providing access to a portfolio of diversified Tier-I, low cost, long-life assets, to deliver significant near term growth. Our Rajasthan fields continue to remain our core asset. The financial strength of the enlarged group will ensure greater access to capital to further Indian oil & gas development.”
Cairn India shareholders are expected to benefit from derisked earnings through increased diversification and exposure to Vedanta Ltd’s tier-I, low cost, longer-life assets.
Cairn Energy, the former parent of Cairn India, currently holds 9.82 per cent in the firm and is expected to get 5.12 per cent in Vedanta Ltd as part of this restructuring. The firm's holding in Cairn India is currently mired in a tax related dispute, with the tax authorities barring it from sale of the shares.
In March, Cairn India got a withholding tax call for around Rs 20,495 crore ($3.26 billion) half of which constitutes interest, for an eight-year-old transaction involving its former parent. This came two days after UK's Cairn Energy received a draft assessment order over pending tax dues worth $1.6 billion.
Cairn India had received the notice for an alleged failure to deduct withholding tax on alleged capital gains arising during 2006-07 in the hands of Cairn UK Holdings Limited (CUHL), its erstwhile parent and a subsidiary of Cairn Energy Plc.
This was in respect of the transaction of CUHL transferring the shares of Cairn India Holdings Limited (CIHL) to Cairn India Limited as part of internal group reorganisation in 2006-07 to facilitate the IPO of Cairn India Limited.
Cairn India has been directed by the tax authorities not to allow the transfer of UK firm's residual stake.
Price Waterhouse & Co LLP and Walker Chandiok & Co LLP, have provided their joint recommendation on the exchange ratio for consideration by the boards of Vedanta Ltd and Cairn India.
Lazard & Co., Limited has acted as financial advisor to Vedanta Ltd for the transaction and the company's board received a fairness opinion from Lazard India Private Limited. The board of Cairn India has received opinions from DSP Merrill Lynch Limited and JM Financial Institutional Securities Limited as to the fairness of the exchange ratio to Cairn India, from a financial point of view.
J.P. Morgan Cazenove and Morgan Stanley are acting as joint financial advisors and joint corporate brokers to Vedanta Resources in relation to the transaction.