Vedanta-Cairn India merger: Is it really a sweet deal?

Vedanta Ltd, Cairn India and Vedanta Resources plc has revised the final terms of merger of Vedanta Ltd and Cairn India considering the prevailing equity market conditions.

In a regulatory filing on Friday, Vedanta Ltd said each Cairn India minority shareholder will get one equity share in the company and four redeemable preference shares with a face value of Rs 10, with a coupon of 7.5% and tenure of 18 months from issuance. 

In order to attract shareholders, minority shareholder will be implied to a premium of 20% to one month Volume-Weighted Average Price (VWAP) of Cairn India share price.

Caution for Cairn India shareholders?

Despite the revised terms are in favour of Cairn India shareholders, cautioning the holders, Motilal Oswal in a research note, said that there some issues which still need to be addressed before the completion of the deal. 

The company has still not received approvals by Petroleum Ministry and FIPB (Foreign Investment Promotion Board) which may become a point of concern for the company, said the research note.

In a regulatory filing, the Jurisdictional High Courts have convened the shareholder meetings for each of Vedanta Limited and Cairn India on 8 September 2016 and 12 September 2016, respectively. At the meeting, majority in number and 75% in value of shareholders present and voting at the shareholder meeting, required to vote in favour of these transactions. 

Sanjay Jain, Researcher in MOSL, in the research report pointed out that there is a possibility of unexpected opposition by minority shareholders, which will again disrupt the deal.

Lastly, value of merger to Vedanta shareholders can be changed either based on contingent tax liability or terms of Production-sharing contract (PSC) extension. In both the cases, it will not be a good news for Cairn India shareholders. 

Earlier, as per the announcement, post the merger, the ownership of Vedanta Plc in Vedanta Ltd is expected to decrease from current 62.9% shareholding to 50.1%. While Cairn India minority shareholders will own 20.2% and Vedanta Ltd's minority shareholder will own a 29.7% stake in the enlarged entity.

Possible cases

Interestingly, there could be two possibilities- Merger successful at current terms or failure of merger. 

Jal Irani, Researcher at Edelweiss Securities Limited, pointed out that if the merger fails, he expect an upside of 22% to Cairn India. But, if the merger completes successfully, which is the more likely event, the upside will only be 12%.

Post the merger

Post the merger, for Vedanta, the biggest positive situation will be that Cairn India's cash balance will become fully fungible. 

As per management, this increased liquidity will lead to re‐rating of the company’s debt, potentially lowering the cost of debt. Further, the debt of $1.5 billion rolled over to Vedanta from Cairn India will be knocked off post the merger, Irani said.

Giving the similar views, Jain said that the outlook for Vedanta's fungible cash flow businesses has improved materially over the past few months amid a recovery in aluminum and iron ore prices, cost benefits and volume growth (thus improving debt serviceability), the merger would further ease pressure on debt obligations. The merger will help in optimizing capital structure of the group and in reducing cost of funding.

At 0930 hours the shares of Vedanta Ltd were trading at Rs 173.25 per piece, up 0.79% on BSE.

At the same time, the shares of Cairn India were trading at Rs 201.45 per piece, up 1.41% on BSE.