Vedanta tightens grip on Cairn with Petronas help

Tightening its grip on Cairn India, London-listed Vedanta Resources on Tuesday snapped a 10.5% stake in the Scottish oil & gas explorer’s India assets from Petronas for $1.5 billion, or Rs6,620 crore, through subsidiary Sesa Goa.

Vedanta now owns 10.5% of Cairn India, in addition to the shares it will get from Sesa Goa’s ongoing open offer, which closes on April 30.

“What this means is that even if the government does not clear the deal, Vedanta gets 30% ownership of Cairn (India), provided the open offer (for buying up to 20% shares) sees full response,” said S P Tulsian, an independent stock analyst.

In a note on Tuesday, Goldman Sachs said Vedanta could now seek a board seat.

“If such a request was approved by Cairn India, this would allow the Vedanta group to examine any strategic decisions regarding Cairn India in the event that the group is unable to secure necessary government approvals,” Goldman analysts Nilesh Banerjee and Vikas S Jain wrote.   

What’s more, Vedanta could now see itself owning between 51% and 70.4% of Cairn India with an investment of up to $11.1 billion, higher than its earlier $9.6 billion bid to buy between 51% and 60% stake.

The deal marks the exit of Petronas from Cairn India, selling its entire 14.94% holding in the company for $2.1 billion, or Rs9,384 crore. While Vedanta bought 10.5% stake, the rest was picked up by institutional investors including Merrill Lynch Capital Markets Espana.

The stake sale, despite being at a 6.8% discount to Vedanta’s open offer price of Rs355 a share, still saw Petronas walking away with a profit of $843 million, or Rs3,735 crore. It had acquired the 14.94% stake in three tranches.

“The transaction brings to a close a successful association as a shareholder with Cairn India since 2006,” the Malaysian state-owned said in an email response, declining to elaborate the reason for the sale.

Girish Vanvari, executive director at KPMG, however, said a possible reason could be that Petronas saves on tax and also avoids the uncertainty it would have faced if it participated in the open offer. “They (Petronas) don’t incur any tax,” said Vanvari, adding that “the company could have paid a tax anywhere between 10% and 20% had they sold the shares in the open offer.”

“(Also) now Petronas is assured of a sum. In an open offer, you tendering your stake is always dependent on the response to the issue. Had the offer seen a response greater than 20%, then they won’t have got the price they wanted,” he added.

Experts said the development reflects the confidence of billionaire Anil Agarwal, whose $9.6 billion bid to control Cairn India has been repeatedly rebuffed by New Delhi over the past eight months.

“Vedanta is undeterred… It is a real smart move and shows what the guy (Anil Agarwal) wants to do,” said a London-based analyst, who referred to Vedanta’s aim of becoming a global resources player rivalling Australia’s BHP Billiton. The analyst, who tracks Cairn Energy, did not wish to be identified as he is not authorised to speak to the media.

In another development that suggests Vedanta is stepping up pressure on the Indian government to stamp its approval on the deal, Sesa Goa also issued a clarification to the Bombay Stock Exchange saying it does not require government’s nod for its ongoing open offer: “Further to the open offer to shareholders of Cairn India Ltd, launched by Sesa Goa on Monday, April 11 2011, the company would like to clarify that it is not subject to the Government of India consent.”

Cairn India shares soared on the news, closing the day 2.29% higher at Rs344.25 on the Bombay Stock Exchange even as the benchmark BSE Sensex was up 0.16% at 19,121.83.

Earlier this month, Vedanta chairman Anil Agarwal’s last-minute efforts to get the deal approved were dashed by New Delhi after the Cabinet Committee on Economic Affairs referred it back to a group of ministers. The oil ministry wants renegotiation of royalty payments made by state-owned ONGC, which, despite holding 30% stake in Rajasthan block, pays 100% royalty on production to the Rajasthan government. This is not agreeable to Vedanta and Cairn as the two companies believe that any change in financials would make the deal less appealing for their investors.