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Anil Agarwal, Group Chairman, Vedanta Resources Plc

Vedanta sweetens merger plan for Cairn shareholders

22 July, 2016

A year after 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), it has now proposed to tweak the plan.

It has now proposed to issue one equity share and four redeemable preference share of Vedanta Ltd for each equity share held in Cairn. Under the original proposal, minority shareholders of Cairn India were to receive one equity share and only one redeemable preference share of Vedanta.

The terms of the preference shares, however, remains the same. They will carry coupon rate of 7.5% 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 original deal announced in June 2015, which sought to consolidate much of Vedanta Resources’ business in India under one roof, had faced flak from minority shareholders of Cairn. In 2013, it had merged Sterlite Industries with Sesa Goa to create Vedanta Ltd.

Anil Agarwal, chairman of Vedanta Resources plc, said: “The simplified corporate structure will better align interests between all shareholders for the creation of long-term sustainable value.”

Sudhir Mathur, CFO and acting CEO of Cairn India, said: “Cairn India shareholders will benefit from exposure to a diversified portfolio of world-class, low-cost, long-life assets with significant growth. We are confident that the financial strength and diversified portfolio of Tier-I assets will provide de-risked earnings and stable cash flows, driving long-term value. Cairn India shareholders will benefit from the revised terms announced today, while retaining the upside from Cairn’s strong oil & gas assets.”

Tom Albanese, CEO of Vedanta Ltd, said: “The strategic rationale for merging Vedanta Limited and Cairn India remains highly compelling. Diversified resources companies have delivered superior returns for shareholders historically. The transaction consolidates our portfolio of attractive Tier-I assets and simplifies the group structure, better positioning the group to deliver superior value to all shareholders over the longer term.”

The boards of Vedanta Ltd and Cairn India approved revised and final terms for the transaction, taking into account prevailing market conditions and having regard to underlying commercial factors, they said on Friday.

Shareholder meetings for each of Vedanta Ltd and Cairn India is schedule on 8 September 2016 and 12 September 2016, respectively.

Majority in number and 75% in value of shareholders present and voting at the shareholder meetings, are required to vote in favour for the transaction to move ahead.

Vedanta plc’s ownership in Vedanta Ltd is expected to decrease to 50.1% from its current 62.9% shareholding. Cairn India’s minority shareholders will own 20.2% and Vedanta Ltd’s minority shareholders will own a 29.7% stake in the merged entity.

Vedanta’s holding in Cairn India would not be converted into treasury shares.

Vedanta Ltd’s share price shot up 7.44% to close at Rs 168.95 each, ahead of the formal announcement of the new merger plan. Cairn India scrip too rose 8.72% to end the day at Rs 192 a share on BSE in a strong Mumbai market on Friday.

Background

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 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 that was expected to close in Q1 of 2016 is now aimed to be completed by first quarter of 2017.

Cairn Energy, the former parent of Cairn India, currently holds 9.8%in the firm and is expected to get 5.12% 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.

Last year, Cairn India got a withholding tax call for around Rs 20,495 crore, half of which constitutes interest, for an eight-year-old transaction involving its former parent. This had come 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.

Advisors

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 Ltd has acted as financial advisor to Vedanta Ltd for the transaction and the company’s board received a fairness opinion from Lazard India Pvt Ltd. The board of Cairn India has received opinions from DSP Merrill Lynch Ltd and JM Financial Institutional Securities Ltd 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.

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Vedanta sweetens merger plan for Cairn shareholders

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