Billionaire Anil Agarwal’s Cairn India Ltd. (CAIR) will spend about $1 billion to buy back shares giving him greater control over the company as environment rules derail his mining business, two people familiar with the plan said.
The oil producer will offer to buy back shares, including Cairn Energy Plc (CNE)’s 10.3 percent stake, and extinguish them, said one of the people, who asked not to be identified before an announcement. The proposal may help Sesa Sterlite Ltd. (SSLT) and Agarwal’s other companies’ boost their ownership in Cairn India to more than 65 percent from about 59 percent, the person said.
“Certainly Cairn Energy’s 10 percent stake in the company will be a natural source of shares,” Alan Greene, a Singapore-based analyst at Moody’s Investors Service, said in a telephone interview. “Cairn Energy’s decision to sell will depend on what the offer price is and its own needs.”
Cairn India, which runs the nation’s biggest onshore oil and gas field and has about $3 billion of cash, is critical to Agarwal at a time when his metals earnings at Sesa Sterlite are languishing due to restrictions on iron ore and bauxite mining and a ban on exports of the steelmaking ingredient from the western state of Goa. Faced with the setbacks, Agarwal is banking on India’s energy demand, forecast to increase 14 percent in the five years to 2015.
The board of Cairn India, based in Gurgaon near New Delhi, will decide on the repurchase tomorrow, according to an exchange filing.
Cairn India, which has 1.9 billion shares outstanding, gained 1.2 percent to 331.10 rupees at the close in Mumbai. The stock has risen 3.8 percent this year, lagging behind the 6.1 percent increase in the benchmark S&P BSE Sensex. Sesa Sterlite rose 0.1 percent to 174.55 rupees
“We expect to be able to share the details of the proposal post the board meeting,” Cairn India said in an e-mailed statement. Cairn Energy spokeswoman Linda Bain wasn’t immediately able to comment.
Agarwal bought into Cairn India two years ago. In August, he combined India’s biggest copper producer Sterlite Industries (India) Ltd. with iron-ore miner Sesa Goa Ltd. in August and transferred ownership of Cairn India to the merged entity.
“Cairn India by buying the shares is reinforcing Sesa Sterlite’s position in the company,” Greene said. “Buyback is quite an effective way to utilize cash and this way they are also utilizing idle cash. Sesa Sterlite would have a bigger proportion of the company and therefore a bigger proportion of the dividend.”
Cairn India plans to spend $3 billion in three years to raise output, according to an Oct. 22 statement. The company, whose output from its biggest field remained at 175,000 barrels a day for at least five quarters, plans to increase production to 300,000 barrels day.
The buyback won’t dent the capital expenditure plan as the company will generate about 90 billion rupees of free cash flow in the year ending March 31 and 75 billion rupees the following fiscal year, Joshi said. Cairn India’s profit rose 46 percent to 33.9 billion rupees in the three months ended Sept. 30, the fastest pace in three quarters.
Revenue from erstwhile Sesa Goa fell after shipments plunged to 3.1 million metric tons in the year ended March 31, the least since Agarwal bought the company in 2007. In six months ended Sept. 30, Sesa Sterlite earned 10.8 billion rupees in dividend, mainly from Cairn India, helping the company report a net income of 28.2 billion rupees.
India’s top court banned ore mining in the states of Karnataka and Goa in August 2011 and October 2012 respectively as it probed violations of environmental norms. The court allowed mining to restart in Karnataka in September last year.
Agarwal’s group, which is aiming to emerge as the nation’s biggest producer of aluminum used in beverage cans and aircraft parts, spent $7.8 billion to build a smelter and a refinery in the eastern state of Odisha. The company is still waiting to light its 1.25 million ton smelter for want of bauxite, which it is unable to secure due to local opposition.
Inhabitants of the remote Niyamgiri hills, the site of the mine, opposed the expansion plan because they believed their god lived in the hills, prompting the government to reject Agarwal’s request for a bauxite mining permit.
“Standalone Sesa is quite weak given its iron ore operations are yet not up and running and its new aluminum smelter is still waiting for secured raw material supplies,” Greene said.
Agarwal had also been trying to buy the government’s stake in Hindustan Zinc Ltd. (HZ), in which Sesa owns 65 percent. This has been delayed because of legal hurdles, limiting his access to the company’s $3.8 billion of cash.
“Cairn India is a cash cow and means a lot for Vedanta at this juncture,” said Dhaval Joshi, a Mumbai-based analyst at Emkay Global Financial Services Ltd. “It’s imperative for Agarwal to take full control of Cairn India.”