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Mer 1 Juin 2011 22:07
Cairn to drop demand for non-compete fee
Posted: Thursday, Jun 02, 2011 at 0337 hrs IST
New Delhi: Edinburgh, UK-based Cairn Energy Plc is planning to add a sweetener to the proposed sale of its Indian business to London-based Vedanta Resources by dropping its demand for a non-compete fee of R50 per share.
This will shave off at least $600 million from the cost of the deal — pegged in the range of $8.5-9.6 billion — which has been hanging fire since last August. The lower price will be an incentive for Vedanta to stay interested even if Cairn finally agrees to share the royalty burden on its Rajasthan crude output with ONGC as per their respective stakes in the project. Sharing the royalty burden will cut into the attractiveness of the deal for Vedanta.
Royalty sharing will lead to lower profits for Cairn India and correspondingly lower dividend payouts, making the deal less attractive for minority shareholders.
The original deal promised the non-compete fee to Cairn Energy for agreeing not to do similar business in India or neighbouring countries for three years. Cairn was to be paid R405 per share including the non-compete fee. Vedanta’s subsidiary Sesa Goa last month bought 8.1% stake in Cairn India for R355 a share through an open offer after paying Malaysia’s Petroliam Nasional R331 a share for another 10.4%.
A person privy to the development said the companies will arrive at an agreement very soon on the fresh terms of the transaction.
“Cairn Energy wants to reduce its Indian presence, while Vedanta Resources has already acquired a substantial stake in Cairn India. The transaction will go through, although at different terms,” said the person. There could be other changes in the terms as well.
The ministerial panel led by finance minister Pranab Mukherjee last Friday decided to clear the deal provided Cairn India agrees to share the royalty burden with ONGC. Cairn will also have to drop its arbitration proceedings against the government on its alleged liability to pay R2,500 a tonne cess on crude production.
Experts tracking the deal said that agreeing to share royalty with ONGC will shave off R16,000-18,000 crore from Cairn India’s revenues in the next 10 years. This would impact the profits of the venture, which is shared among Cairn India, ONGC and the government. Minority shareholders are not happy either at the prospect of forcing Cairn to share the royalty outgo. Now, ONGC fully pays 20% royalty on the crude output from Cairn-operated Barmer oilfield although it has only 30% participating interest in the block, which it got free of cost after oil discovery.
Minority shareholders say that the prospect of Cairn India sharing royalty was not part of the disclosures made when it went public four years ago, based on which many of them subscribed to the issue. Besides, the company has made resolutions to protect its minority shareholders. Royalty sharing goes against the letter and spirit of this promise, they say.
Government’s linking of ONGC’s demand for royalty sharing and approving the proposed transaction between the companies is unfair and fundamentally incorrect, said Jigar Valia, a Mumbai-based financial analyst who is also minority shareholder in Cairn India. “Because of the delay in approving the deal and the uncertainty surrounding government clearance, Cairn India shares are trading lower now than when it was announced last August. This is affecting minority shareholders,” said Valia. Pending disputes between ONGC and Cairn should be dealt with legally and should not be mixed up with the merits of the transaction, he said. Cairn has a total public shareholding of 18.8% which includes mutual funds, banks and financial institutions, insurance companies and foreign institutional investors.
