Indian mining and energy group Vedanta Ltd made a $2.3 billion offer on Sunday to buy out minority shareholders in cash-rich oil unit Cairn India, a deal that helps parent Vedanta Resources Plc repay hefty debts.
However, the deal faces potential objections from two of its top minority shareholders.
Shareholders in Cairn India, India's top private sector oil producer, will get one share in Vedanta Ltd for every share held, the companies said in a joint statement on Sunday.
The shareholders will also get one redeemable preference share in Vedanta Ltd with a face value of 10 rupees, making the deal worth roughly $2.3 billion. That implies a premium of 7.3 percent to Cairn's Friday close and a ratio of 1.04 for 1, marginally better than expectations of a simple 1 for 1 swap.
Vedanta began simplifying its complex structure with a 2012 overhaul, but further moves to clean up the group and buy out minorities in its cash generating units have long been awaited by the market. Cairn India has a roughly $2.6 billion cash pile.
The deal, expected to close in the first quarter of 2016, is the first major structural change under Vedanta Ltd Chief Executive Tom Albanese, the former Rio Tinto boss appointed last year. He said the deal moved Vedanta closer to its goal of being a major diversified player.
Vedanta’s billionaire founder Anil Agarwal bought a controlling stake in Cairn India from the UK-based Cairn Energy for $9.6 billion in 2011.
There are two potential obstacles to the deal going through. One, new Indian rules say that the merger needs to be backed by a majority of the minority shareholders who vote. Life Insurance Corporation of India is one such shareholder, with a nine percent stake. Being a state-backed firm, it might toe the government line that Cairn is a strategic player in the petroleum sector and should not be merged with Vedanta.
Vedanta is also currently contesting a $3.3 billion tax claim from the tax authorities in relation to Cairn India's 2007 listing. That liability and a $1.2 billion inter-company loan advanced by Cairn India to its parent last year were factored into the deal, Vedanta Chief Financial Officer DD Jalan said.
Second, Cairn Energy Plc, which is Cairn India's former owner and largest minority shareholder with 10 percent, might have objections. It did not agree outright to the merger and said that it would assess if the proposal is in its interest. The company has been looking to sell its shares in Cairn India, but might want a better deal.
Analysts say the deal might just make it through. “Cairn shareholders might have wanted more, but the one-is-to-one share deal is more even-handed than many expected,” said Amit Tandon, director of Institutional Investor Advisory Services, a Mumbai-based research group, in this report.
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Vedanta Resource Plc, controlled by one-time scrap metal dealer Anil Agarwal, currently holds a majority interest in Mumbai-listed operating unit Vedanta Ltd, which in turn holds a 59.88 percent stake in Cairn India.
But Vedanta Ltd also holds other assets, including about 65 percent in Hindustan Zinc, whose minorities are likely to be the next target of the group's clean-up effort, and aluminium producer BALCO, in which it has a 51 percent stake. Both companies count the Indian government as minority shareholders, limiting Vedanta's ability to move.
"We would look forward to participate in what would likely be an auction at that point in time," Albanese said on Sunday. Though long-expected, the timing of the Cairn buyout is likely to have been triggered by a sharp drop in Cairn India's stock as oil prices fell, making for a favourable merger ratio for Vedanta. Cairn India shares have dropped over 50 percent over the past year.