Vedanta May Accept Cairn Takeover Conditions as Oil Makes De
By Rakteem Katakey - May 30, 2011 10:12 AM GMT+0200
A worker is seen at Cairn Energy Plc's Mangala processing terminal in Rajasthan, India. Source: Cairn Energy via Bloomberg
Vedanta Resources Plc (VED) may accept the Indian government’s conditions for approving its planned $9.4 billion bid for control of Cairn India Ltd. (CAIR) as high crude oil prices make the deal attractive, investors said.
London-based Vedanta may agree to pay its share of royalties from the nation’s biggest onshore oil deposit, currently borne by Cairn India’s state-owned partner, according to K.R. Choksey Shares & Securities Pvt. and Aletti Gestielle SGR SpA. Vedanta bought an 18.5 percent stake in April and needs Cabinet approval to buy a further 40 percent from U.K.-based Cairn Energy Plc. (CNE)
“The rising oil price is the only reason Vedanta would still be interested in Cairn India,” said Deven Choksey, managing director at K.R. Choksey Shares in Mumbai. “The royalty condition will change the deal valuations and prolong Vedanta’s pay-back period. Only the oil price will keep them going.”
Vedanta’s bid, announced in August, is valued at a total of $9.4 billion, Chairman Anil Agarwal said May 5. As part of the deal, Vedanta’s Sesa Goa Ltd. (SESA) unit bought 8.1 percent from minority shareholders last month, paying 355 rupees a share. Vedanta separately acquired a 10.4 percent stake from Malaysia’s Petroliam Nasional Bhd. and will buy another 40 percent from Cairn Energy.
Panel Recommendation
A ministerial group led by Finance Minister Pranab Mukherjee met May 27 and recommended approving the deal with conditions, including reducing state-owned Oil & Natural Gas Corp.’s royalty burden for Cairn India’s main asset, two people with knowledge of the matter said. The panel’s advice will be sent to the Cabinet within two weeks, Oil Minister S. Jaipal Reddy said after the meeting, without giving more information.
ONGC, owner of a 30 percent stake in the oilfield in Rajasthan state, previously said the deal shouldn’t proceed without changes to the royalty agreement, which delayed Vedanta’s bid to acquire 58.5 percent of the explorer.
Oil’s 33 percent gain since the deal was announced on Aug. 16 will help offset a drop in Cairn India’s profit if its share of royalty from the field in Rajasthan state is recovered from customers, said K.K. Mital, a fund manager at Globe Capital Market Ltd. in New Delhi. The change would cut Cairn India’s earnings by 15 rupees a share, or 45 percent of the 33.36 rupees for the year ended March 31, Mital and Choksey estimated.
Royalty Burden
Agreeing to bear the royalties for the Rajasthan field may result in a burden of about $900 million for Cairn India over the 12-year life of the field, said Jagannadham Thunuguntla, chief strategist at SMC Wealth Management Services Ltd.
“From Vedanta’s point of view, the situation has already improved as higher oil prices have made the economies of its bid much better,” said Walter Rossini, who manages 250 million euros ($358 million) in an India equity fund at Aletti Gestielle SGR SpA in Milan. “Vedanta would want to close this deal as soon as possible.”
Pavan Kaushik, a spokesman for Vedanta, didn’t answer two calls to his mobile phone seeking comment.
Vedanta plans to borrow $6 billion to fund the acquisition, Chief Financial Officer Din Dayal Jalan said May 5. Of that, $3.5 billion will be from bank loans, $1.5 billion from a bond sale and $1 billion from equities, he said then. The mining and metals company priced a $1.65 billion bond offering on May 27.
Bond Yield
Vedanta’s five-year credit default swaps rose 21.8 basis points, the sharpest increase in almost seven weeks, to 505 basis points on May 27, according to prices provided by CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers in the privately negotiated market.
The yield on Cairn India’s 8.35 percent rupee bond due July 2012 increased to 9.88 percent to a record on May 27 from 9.76 percent a day earlier, according to prices compiled by Bloomberg. The company’s shares have advanced 1.6 percent since the deal was announced, compared with a 1.2 percent gain in the benchmark Sensitive Index of the Bombay Stock Exchange.
Oil prices have risen every month from September and reached a high of $113.93 a barrel on April 29. Crude for July delivery was at $100.02 a barrel in electronic trading on the New York Mercantile Exchange at 12:59 p.m. India time.
“Oil prices are expected to stay high and Cairn’s profitability and cash flows are strong,” said Mital of Globe Capital. “Maybe Anil Agarwal will realize that even at $80-$90 oil price, Cairn India will be a profitable cash cow.”
The explorer, based in Gurgaon near New Delhi, reported a record net income of 24.6 billion rupees in the three months ended March 31, a 10-fold surge from a year earlier, according to a May 25 statement.
Vedanta has offered Cairn India’s Edinburgh-based parent 405 rupees a share, including a non-compete fee of 50 rupees. Cairn Energy said in a May 27 statement it hasn’t yet received formal confirmation of any decision made by India’s government.
To contact the reporters on this story: Rakteem Katakey in New Delhi at rkatakey@bloomberg.net;
To contact the editor responsible for this story: Amit Prakash at aprakash1@bloomberg.net.
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