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Vedanta May Use $1.5 Billion Cairn India Stake as Offer Hedge

The Indian headquarters of Vedanta Resources Plc stand in Mumbai, India. Photographer: Adeel Halim/Bloomberg
The Indian headquarters of Vedanta Resources Plc stand in Mumbai, India. Photographer: Adeel Halim/Bloomberg

Vedanta Resources Plc’s $1.5 billion purchase of a stake in Cairn India Ltd. from Petroliam Nasional Bhd. may provide a hedge against any shortfall in take-up for a broader offer for the oil explorer, investors said.

Vedanta’s Sesa Goa Ltd. unit bought 10.4 percent of Cairn India for 331 rupees a share, the London-based parent said in a statement yesterday. That’s 6.8 percent lower than the price proposed by Sesa Goa in an open offer for as much as 20 percent of Cairn India, and 3.8 percent below yesterday’s closing price.

Vedanta’s purchase from the Malaysian company known as Petronas, on top of the open offer, may result in it holding 51 percent to 70.4 percent of Cairn India, according to the statement. Sesa Goa’s offer is part of Vedanta’s $9.6 billion bid announced in August for the operator of India’s largest onshore oilfield. The government is yet to approve the takeover.

“With this 10.4 percent stake now secured below the offer price, Vedanta could acquire a 51 percent stake for up to $318 million less, marking a 4 percent discount,” Liberum Capital Ltd. wrote in a note to investors today. The transaction may encourage other minority shareholders, who were previously undecided, to sell their stakes, Liberum said.

Cairn India rose 1.4 percent to 348.85 rupees at the close of trade in Mumbai, while Sesa Goa gained 0.4 percent to 308.45 rupees. Vedanta advanced 3.1 percent to 2,338 pence at the close in London.

Shareholder Uncertainty

“Probably the reason for the Petronas deal is to make up for the shortfall from the open offer,” D.K. Aggarwal, chairman of SMC Wealth Management Services Ltd., said by phone from New Delhi. “There’s a lot of uncertainty about the deal still, and shareholders may not be willing to tender their shares. If the deal fails, the value of the shares will fall significantly.”

The Petronas deal increases the minimum acceptance ratio in the open offer to 75 percent from 53 percent, Harshad Katkar and Amit Murarka, analysts at Deutsche Bank AG, said in a report. “This underscores Vedanta’s seriousness in acquiring a majority shareholding in Cairn India,” they said. Sesa Goa hasn’t disclosed how many shares have been tendered so far.

Sesa Goa was forced to delay its offer to Cairn India’s minority investors this month and extend a deadline to complete the transaction to May 20 from April 15 after India’s cabinet asked ministers to study the proposal.

Oil Minister Jaipal Reddy said yesterday the panel of ministers hasn’t fixed a date to meet. “I am not in a position to give a timeframe for a decision,” Reddy told reporters in New Delhi.

Win Control

“Petronas’s exit is probably part of the overall strategy for Vedanta to get control of Cairn India,” said Walter Rossini, who manages a 250 million-euro ($358 million) equity fund at Aletti Gestielle SGR SpA in Milan and doesn’t plan to sell Cairn India shares in the open offer. “The open offer price is okay at $90 crude. At above $100, it is not so interesting.”

Crude oil has gained more than 45 percent since Vedanta’s Aug. 16 announcement to buy a majority stake in Cairn India. Oil futures on the New York Mercantile Exchange traded at an average $94.60 a barrel last quarter, and touched $113.46 on April 11.

Vedanta, controlled by billionaire Chairman Anil Agarwal, is offering Cairn India’s majority shareholder Cairn Energy Plc 405 rupees a share, including a non-compete fee of 50 rupees. Cairn Energy will sell 40 percent to 51 percent of its holding to Vedanta, depending on the result of Sesa Goa’s open offer.

‘Upbeat’ Oil

“As the hangover of the open offer goes off we expect Cairn India stock to normalize and move beyond the 370-rupee levels if crude prices continue to remain upbeat,” said Yogesh Radke, head of quantitative research at Edelweiss Securities.

Cairn India produces about 125,000 barrels a day from the Mangala field in the Rajasthan block, the nation’s biggest oil deposit on land. The company may start Rajasthan’s Bhagyam field in the second half and reach peak output of 40,000 barrels a day by the end of the year, according to a Feb. 10 statement.

Petronas sold its entire 14.9 percent holding in Cairn India for $2.1 billion, Malaysia’s state oil and gas producer said in a statement yesterday, without identifying the buyers.

Bank of America Corp. helped sell the shares, said two people with knowledge of the transaction, who declined to be identified because the information is private. Mona Kwatra, a spokeswoman for Bank of America, and Manu Kapoor, a spokesman for Cairn India, declined to comment.

Pavan Kaushik, a spokesman for Vedanta in India, didn’t answer six calls to his mobile phone. Emily Dimmock, a spokeswoman for the company in London, declined to comment.

Bank Rankings

Bank of America is ranked sixth in managing domestic share sales by Indian companies this year, with SBI Capital Markets Ltd. ranked first, followed by HSBC Bank Plc, according to data compiled by Bloomberg. Indian companies have raised 83 billion rupees ($1.87 billion) in local share sales in 2011, a fifth of the amount in the same period last year, the data show.

Petronas acquired 10 percent of Cairn India at 176.48 rupees a share before the explorer’s December 2006 initial public offering. The Kuala Lumpur-based company bought more shares at 224.30 rupees each in a preferential allotment in March 2008 and paid about $240 million for a further 2.3 percent stake in October 2009, taking its total holding to 14.9 percent.

Shamsul Azhar Abbas ordered a review of Petronas’s global investment portfolio after taking over as chief executive officer in February 2010 as he sought to invest more at home to boost the country’s oil and gas reserves, he said in November.

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