Manivel's Blog

An Indian M&A like BHP Billiton

Vedanta Resources plc’s bid for 60% stake in Cairn India has attracted both the Industry and Market’s attention. As per the Executive Chairman of Vedanta, Mr. Anil Agarwal, the decision to make an entry into the oil & exploration industry is taken after 2 years of market research and Cairn India could give the perfect entry for Vedanta into India, making it as bigas the BHP Billiton merger.

The takeover does make little sense when Anil Agarwal said, “Vedanta has cash reserves of $8 billion, which earns about 5% while the takeover of Cairn India could earn him a return of 15%”. The acquisition is worthy under certain considerations like it would enable debutant Vendanta to participate in the next round of bidding under the New Exploration Licensing Policy (Nelp) and Vedanta would become equal to the likes of Reliance Industries. If completed, the Vedanta-Cairn deal would be the third largest acquisition by an Indian Company.

The acquisition has also raised questions among the Analysts, minority shareholders, and Cairn India’s 30% partner in the Rajasthan field, ONGC. Analysts are apprehensive about the mineral and metals group’s capabilities in the oil business. While, Vedanta shareholders are anxious about the post-deal balance sheet ($10 billion debt) and the Rs.405/- a share price given to promoters as against Rs.355/- given to the minority shareholders.

Also, making use of cash reserves of Vedanta’s subsidiaries like Sesa Goa has put the latter’s shareholders into worry.

ONGC, which has 30% stake in Cairn’s prolific blocks in Rajasthan including the oil-rich Mangala field, has asked Cairn & Vedanta for complete details and documents of the deal. ONGC pays 100% royalty for the Rajasthan field to the State Government although it holds only 30% stake in the field, under the terms of production-sharing contract (PSC) signed 15 years ago.

The Government’s push on ONGC to counter-bid for Cairn India doesn’t work out well since ONGC feels the deal to be overpriced. Also, it does not make sense for it to buy assets at $10 billion within country. They could do better to buy some assets abroad as it would add to energy security.

Anil Agarwal who has built his empire buying sick assets cheap and turning them around, is optimistic over the acquisition. He has assured that there are no plans to change the management of the Cairn India once the acquisition is made. The premium paid by Vedanta is 20% over the market price, which usually is 30-35%, making it a sensible business proposition.

The issue with ONGC would subsidize once the sharing terms are decided to be economic for both Vedanta and ONGC after the acquisition.

Vedanta will require a huge growth in many of its current commodity exposures in India, in the next 3-5 years. So, moving into new resource areas via M&As, in many ways, is required to keep growing the business beyond 2015.

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This entry was posted on September 7, 2010 by in Business.

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