LONDON—Concerns over the valuation of minority shares in a
complex deal to combine two of India's biggest resources
companies—Cairn India and Vedanta Ltd.—have cast doubt on whether
shareholders will approve it.
Vedanta Resources PLC, India's biggest diversified
natural-resources company, agreed last month to merge those two
subsidiaries in an all-share deal. The proposal would free up
billions in cash for debt-laden Vedanta Resources and simplifies
its unwieldy corporate structure.
But U.K. oil explorer Cairn Energy PLC—Cairn India's largest
minority shareholder with a 10% voting stake—has concerns over the
deal's valuation of its shares, a person familiar with the matter
said.
And state-owned insurer Life Insurance Company of India, which
holds around a 9% stake in Cairn India, is being urged to vote
against the combination as well.
"It is blatantly a raw deal for the minority investors," said
Shriram Subramanian, founder and managing director of InGovern
Research Services, India's leading independent proxy advisory
firm.
Shareholders will vote on the Cairn-Vedanta merger at an
unspecified date in the fourth quarter. Indian regulatory rules
require that a majority of Cairn India's minority shareholders
approve the deal.
As Cairn India's two largest minority shareholders, Cairn Energy
and Life Insurance Co. of India could potentially block the deal
given that they would hold nearly half of the eligible voting
shares.
A spokesman for Cairn Energy reiterated the company's previous
statement that it continues to assess whether the proposal is in
the interests of Cairn as a shareholder in Cairn India Ltd. Life
Insurance Co. didn't respond to a message seeking comment.
Vedanta's Chief Executive Tom Albanese said in a statement there
is still a long time to go before the deal is put to a shareholder
vote.
"People will come round. This transaction is still as compelling
as it was a month or so ago," he said.
The deal would fully combine Cairn India, one of the country's
independent largest oil-and-gas companies, and Vedanta Ltd., which
produces iron, zinc, copper, aluminum and electricity. Vedanta also
has oil and gas after spending $9.6 billion in 2011 to buy a 60%
controlling stake in Cairn India.
Both companies are majority owned by Vedanta Resources PLC, a
holding company that also owns a majority stake in Zambian copper
miner Konkola Copper Mines PLC.
Cairn Energy PLC created Cairn India and then listed it in 2007,
but now only owns a 9.8% stake.
Under the proposed deal, Vedanta Ltd. would issue one of its own
shares for each share it doesn't already own of Cairn India plus
offer a cash sweetener of one redeemable preference share that pays
a fixed dividend. The transaction valued the 40% stake that Vedanta
doesn't already own in Cairn India at about $2.3 billion when the
deal was first announced.
The deal may be hard for Cairn Energy and LIC to stomach as
Cairn India's share price has been trading above Vedanta's since
the deal was announced. This indicates that the one-to-one share
price ratio may not be enough.
The combination would give Cairn Energy exposure to metals that
have been blasted by a rout in commodity prices, but which could
provide more stability than the oil price, which has the potential
to fall further. Its current business strategy has been to keep a
stake in Cairn India, an oil-and-gas company.
Barclays PLC mining analyst Amos Fletcher said the "ball is back
in Vedanta's court to see what it wants to do."
Vedanta doesn't have much wiggle room to sweeten its offer, he
said. It can't adjust the share-swap ratio without risking its
premium listing status in the U.K., something the company said it
is committed to retaining.
There is a limit to how much more they can sweeten the cash-like
component—the preference shares—which he estimates are worth $117
million. Increasing it could put the company at risk of breaching
its debt covenants, he added. The company had net debt of $8.5
billion as of the end of March.
Saurabh Chaturvedi in New Delhi contributed to this article.
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