Is Vedanta trying to Cheat Minority Shareholders of Cairn Energy through Controlling Premium Ruse?

Vedanta Resources the Indian Mining Giant has made a $9.6 Billion offer to buyout a controlling stake in Indian listed company Cairn Energy.This will give Vedanta a 51% stake in the company which is producing almost 125 thousand barrels of oil from India’s western state of Rajasthan.Cairn Energy has become India’s second largest producer of Oil leveraging its discovery of Oil in the deserts of Rajasthan.London based parent Cairn is an Oil Explorer and its Indian operations are the crown jewel of its global operations.This deal will allow Cairn to exit Indian operations almost completely as it will just retain a 11% equity stake.Being an oil explorer,Cairn does not have much interest in development of the oil fields . Vedanta which is a mining giant takes its first step into Oil through this acquisition.However the deal is fraught with potential pitfalls.The first is the controlling premium issue and second is the objections from ONGC.

Is Vedanta tries to shaft Minority Shareholders through Controlling Premium Ruse?

Under Indian stock market regulations,if a company acquires a controlling stake in another company,it has to buy 20% stake in the company from minority shareholders.To reduce its expense Vedanta will only pay  Rs 355/share to minority shareholders in the open offer while offering Cairn Rs 405/share .This will include Rs 50/share for a non compete agreement.This seems a ruse to shaft minority shareholders as I don’t think Cairn poses much of a threat to Vedanta from further Oil Explorationin India.I don’t know how Vedanta’s returns from the Cairn’s oil fields can be impacted through Oil Exploration by Cairn’s parent in the future.Indian stock market regulator had earlier rejected Heidelberg’s premium to be paid to SK Birla Group when buying Mysore Cements stake.The controlling premium has been paid in earlier M&A by foreign promoters to Indian promoters.The area of controlling premium remains a grey one and I think it is being exploited by Vedanta to lower its open offer price.It remains to be seen if SEBI rules in the favor of the minority shareholders.

ONGC,India’s largest Oil and Gas Company has objected to the takeover of Cairn Energy.Note ONGC is a partial stakeholder in most of Cairn’s Fields and may invoke the right of first refusal.Note the takeover of Cairn Energy will have to be approved by the Indian government first and ONGC refusal might derail the whole deal.However Vedanta is one of the most politically well connected industrial groups and is confident of going through with the acquisition.

Vedanta to Buy Stake in Cairn India for as Much as $9.6 Billion – Bloomberg

Vedanta Resources Plc, the mining company controlled by billionaire Anil Agarwal, agreed to buy as much as 60 percent of Cairn India Ltd. for $9.6 billion to gain access to India’s biggest onshore oil field.

Vedanta, based in London, will pay a total of about $8.5 billion to $9.6 billion in cash, the company said today in a statement. The price is a 32 percent premium to Cairn India’s average closing price over 90 days. Cairn Energy Plc, Cairn India’s parent, will return a majority of the cash raised to shareholders and invest the rest in exploration.

Vedanta is following the strategy of BHP Billiton Ltd., the world’s largest mining company, by adding oil assets to zinc, copper, iron ore and aluminum businesses. The purchase will give the company access to the Mangala deposit in Rajasthan. Cairn India is 62 percent held by Edinburgh-based Cairn Energy

No premium to Birla, Sebi tells Heidelberg – BS

The Securities and Exchange Board of India (Sebi) has asked German cement maker Heidelberg Cement AG to acquire shares of Mysore Cements from the Indian promoters, the SK Birla group, at the same price at which it bought shares from public shareholders during the recently-concluded open offer.

Following this order, Heidelberg Cement will need to pay only Rs 58 per share, instead of the earlier agreed Rs 72.50 apiece. This 25 per cent premium was agreed as a “non-compete fees” to the Indian promoters when the German major took majority control in Mysore Cements in 2006.Also, the existing promoter group (other than the sellers) continues to be represented on the board of the target company, even after the acquisition. “The sellers were part of the promoter group of the target company when it had been a sick company and they could not revive the affairs of the company. It was only after infusing funds by the acquirers that the target company was revived and came out of the reference of Board for Industrial and Financial Reconstruction,” said the order, a copy of which is with Business Standard.
Sebi said these peculiar facts clearly suggest that the sellers cannot be considered competitors in the same line of business as that of the target company.

Cairn boss to brief govt on stake sale, as ONGC cries foul – Yahoo

ONGC, which has a stake in nearly all of Cairn Energy’s Indian operations, should have been given the right of first refusal if Cairn had decided to sell its stake to Vedanta, sources said. The company may seek legal opinion about the options available, they added.

“We always knew that Cairn Energy is not here to stay,” said an ONGC executive. “But selling its majority stake to Vedanta Resources, which has no expertise at all in the oil and gas operations, makes it clear that Cairn was only keen to make the most of its investments in India.

” Speaking to reporters from London, Bill Gammell said, “It’s the right time to realise some of the value we have created.” However, he maintained that Cairn Energy was not exiting India.