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Vedanta Resources In Last Lap To Acquire Cairn India

06 May, 2011

London Stock Exchange-listed Vedanta Resources is now in the last lap to complete the purchase of a majority stake in Cairn India in what would cost it around Rs 42,932 crore ($9.6 billion) in total. The metal & mining group has acquired 18.5 per cent, following completion of the open offer to buy shares from the minority shareholders.

Vedanta, which had last month acquired 10.4 per cent in Cairn India from Malaysian national oil company Petronas in a deal worth Rs 6,620 crore ($1.48 billion), said on Friday that it had acquired 8.1 per cent additional stake in the open offer.

The open offer would have cost the firm Rs 5,502 crore ($1.23 billion) and it now needs the final piece of the transaction where it will buy 40 per cent of the 62.21 per cent holding of another UK-listed firm Cairn Energy Plc., which will cost it around Rs 31,100 crore ($6.9 billion).

On Friday, Cairn Energy Plc. said that it would sell a stake in Cairn India equivalent to 40 per cent to Vedanta and would continue to hold 21.7 per cent in the firm post-deal. Vedanta will end up with 58.5 per cent in Cairn India. The deal was structured to ensure that Vedanta would get control of the firm with 51 per cent stake.

The company expects to close the transaction soon, as it expects to receive pending regulatory approvals for the share purchase from Cairn Energy in the next few weeks. This will count as the second large-size transaction in the energy sector after Reliance struck its mega deal with British Petroleum earlier this year.

The regulatory approvals have proved to be a tricky affair, given the many hurdles facing the deal. There are issues related to royalty payments to the government, given its partnership with state-controlled ONGC in its key assets in India, besides questions over the track record of Vedanta Group related to environmental issues in its mining operations and its lack of business expertise in the oil & gas sector.

Vedanta made a smart move by acquiring Petronas stake at a discount to the open offer price of Rs 355 per share. The shares were acquired from Petronas at Rs 331 a piece or 6.7 per cent less than the price at which Petronas could have sold a part of its shares in the open offer.

Petronas apparently went ahead with the market deal at a lower price due to tax considerations over its capital gains. However, its exit raised a question mark over investor confidence in Cairn India with the new promoter.

Cairn India scrip has visibly been affected. The share price dropped 3.7 per cent to close at Rs 333 on Friday, valuing it at around Rs 63,600 crore ($14.2 billion).

Done For A Few Dollars Less?

Interestingly, Vedanta Resources management said on Thursday that they had sealed the deal at $9.4 billion against the previously announced value of the deal at $9.6 billion. Media reports suggested the $200 million savings was to do with the purchase of Petronas shares at a cheaper rate.

VCCircle estimates, however, shows that this could, at best, be part of the reason as Vedanta saved only Rs 480 crore or around $110 million by acquiring Petronas at a discount. The rest could be due to differences in exchange rate since the deal was announced.

Indian rupee has gained around 3 per cent against the US dollar and if one considers the exchange rate last August, then the deal value, indeed, stands to come down to around $9.4 billion. But at the current rupee-dollar rate, the deal works out to be $9.6 billion. The final figure would also depend on the agreement between the acquirer and the seller, as the share capital has changed since the time the deal was announced.

If Vedanta will purchase 40 per cent of the latest share capital, the deal will still cost it $9.6 billion as per current exchange rate.


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Vedanta Resources In Last Lap To Acquire Cairn India

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