This Article is From Jun 16, 2015

Have Cairn Shareholders Got a Raw Deal from Vedanta? Analysts Divided

Have Cairn Shareholders Got a Raw Deal from Vedanta? Analysts Divided
Cairn India shares fell on Tuesday amid concerns that the company's potential merger with Vedanta Ltd may not benefit minority shareholders of the oil producer.

Criticizing the proposed merger, proxy advisory firm InGovern said, "The minority shareholders of Vedanta Limited gain at the detriment of the minority shareholders of Cairn India."

Some of the red flags raised by InGovern are,

1) Socializing of debt: As of March 2015, Vedanta Ltd had a total debt of Rs 74,000 crore, while Cairn India was a debt-free company. Post the merger, Vedanta's debt will be "socialized" among public shareholders, whose number will go up from 365,905 to 626,783, InGovern said.

2) Legacy issues: Minority shareholders of Cairn India will be saddled with legacy issues associated with Vedanta Aluminum such as problems with refinery expansion in Orissa, human rights violation charges at the Lanjigarh refinery and challenges over Vedanta's bauxite mining plans in Orissa, InGovern said.

3) Cairn India had in July 2014 doled out a $1.25 billion (Rs 8,000 crore) loan to its parent Vedanta; together with the Rs 17,000 crore in cash balance it now has, Cairn India will end up paying Rs 25,000 crore to Vedanta Ltd if the merger goes through. This will be roughly equal to the debt of Rs. 26,850 crore acquired by Vedanta Ltd from Vedanta plc at the time of acquisition of 38.68 per cent stake of Cairn India, InGovern said.

(Also read: Why Cairn India-Vedanta Deal is a Win-Win for Shareholders)

Brokerages such as Nomura also criticized the proposed merger, questioning the timing of the merger. Cairn India shares are trading near five-year lows after falling by 50 per cent over the last one year.

"While weak oil prices have had an impact on the stock's outlook and are behind the stock's weak performance, we think concerns about an unfavourable merger have also been a key reason for the stock's underperformance," Nomura said.

Nomura also criticized the terms of the proposed merger according to which shareholders will get one share of Vedanta and one Rs 10 face value redeemable preference share (implying 7.3 per cent premium to Cairn's Friday price of Rs 180.75).

"Cairn India currently has cash and equivalent of Rs 17,000 crore or Rs 91/share. In addition, it has loaned $1.25 billion (Rs 7,800 crore or 42/share) to the Vedanta group. Thus, Cairn India effectively has cash of Rs 133/share. Total consideration of Rs194/share (Rs184 for each share of Vedanta plus Rs10 for redeemable preference share) implies that the core business of Cairn India has been valued at just Rs 61/share. This seems very low compared to Rs 180/share in our DCF based sum of the parts valuation," Nomura said.

However, another proxy advisory firm Institutional Investor Advisory Services (IiAS) termed the proposed merger as "fair". Cairn India will get access to low-cost, longer lift cycle assets; the combined entity will have a diversified product portfolio, which will help Cairn India ride cyclical downturn of oil prices and lead to stable cash flows, IiAS said.

The 7.3 per cent premium Vedanta has offered to acquire Cairn India is much lower when compared to similar deals in the past, but IiAS said the valuation seemed "fair" because Vedanta is already the controlling shareholder in Cairn India.

Cairn India shares closed 3.1 per cent lower at Rs 181.90 on the NSE, underperforming the broader Nifty, which gained 0.42 per cent to end at 8,047.