Vedanta Ltd. is trying to win over minority shareholders of Cairn India to reach the deal they want, but one of them wants a sweeter deal in return for support. And analysts are not convinced that Vedanta's offer is good enough.
Life Insurance Corporation of India (LIC), which holds a 9 percent stake, has sought a better offer. Investors were anyway worried that cash-rich Cairn India — with Rs 16,867 crore of cash — will become part of the new entity, and Vedanta will use that to reduce its debt burden of Rs 37,636 crore.
According to Vedanta's current offer, shareholders will get one share in Vedanta Ltd for every share held. They will also get one redeemable preference share in Vedanta, with a face value of Rs 10. That makes the deal worth $2.3 billion, and implies a premium of 7.3 percent to Cairn's closing price Friday.
LIC wants the premium on the preference shares on offer. LIC's vote in support of the deal will be crucial in getting it done, becuase of its large shareholding. Indians laws require that majority of minority shareholders must agree for the deal to go through.
Meanwhile analysts have questioned the benefits of the deal for Cairn shareholders, because Cairn India, one of India's top oil producers, might be better off as an independent company than merging with Vedanta, which has huge debt on its balance sheet.
“Our scenarios suggest their (Cairn minorities’) risk/reward is more favourable in an independent Cairn than a merged Vedanta,” said a Barclay’s report. "Commodity prices are soft, regulatory hurdles in Vedanta Aluminium persist, power is under strain and even a merged Vedanta, without Hindustan Zinc, will have a stretched balance sheet – especially if Vedanta Plc needs support for servicing its debt."
A ICICI Securities report says that the premium on offer gives nothing to cheer about. “Although the merger ratio implies a premium of 7.3 per cent to Cairn’s previous closing price, it is disappointing, in our opinion, as it factors in Brent crude prices of only $50 a barrel in perpetuity,” said Mayur Matani of ICICI Securities.