Cairn India Minority Shareholders May Reject Merger, CLSA Says

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Billionaire Anil Agarwal’s move to absorb his energy unit Cairn India Ltd. into Vedanta Ltd. may prove to be a “raw deal” for minority shareholders of the oil and gas producer.

“The merger plan may be rejected by minorities,” Vikash Kumar Jain, an analyst at CLSA Asia-Pacific Markets, said in a note to clients on Monday, a day after the companies announced the merger. “Approval from government due to court cases and minority shareholders because of unattractive valuations may prove a hurdle for this merger.”

A rejection will hinder Agarwal’s access to Cairn India’s $2.7 billion cash as he seeks to lower the cost of a $12 billion group debt. An approval will create an entity with a market value of about $11 billion, based on the last traded price of Vedanta Ltd.

Cairn UK Holdings Ltd. and the state-owned Life Insurance Corp. of India together hold about half of the 40.1 percent minority shareholding in Cairn India. Cairn UK, which sold control to Agarwal in 2011, is prevented from selling its remaining 9.8 percent stake in the company until it resolves a tax issue with the Indian government. India’s tax department, which has frozen Cairn UK’s stake following the dispute, must also approve the merger, according to Credit Suisse Group AG.

“Cairn UK and LIC are unlikely to oppose,” Neelkanth Mishra and Ravi Shankar, analysts at Credit Suisse, said in a client note on Monday. “Cairn UK, keen to monetize its stake, may find it easier with more liquid Vedanta stock.”

Panaji, Goa-based Vedanta Ltd., the nation’s largest producer of aluminum and copper, will engage with the minority shareholders in Cairn India and is confident they will approve the merger, Cairn India Chief Executive Officer Mayank Ashar told reporters at the media briefing in Mumbai on June 14. The oil producer will also need approvals from the Indian government, the judiciary and the stock market regulator.

Rejection Boost

A rejection by minority shareholders may boost Cairn India’s stock by 40 percent to 50 percent, CLSA forecast in the note, upgrading the stock to a buy rating.

Both Cairn India and Vedanta Ltd. shares fluctuated between gains and losses on Monday. Cairn India gained as much as 4.5 percent to 188.90 rupees, rebounding from a drop of as much as 2.8 percent. The shares traded at 187.40 rupees as of 2:32 p.m. in Mumbai. Vedanta Ltd. fell 0.7 percent to 182.60 rupees, having earlier risen as much as 2.9 percent. Vedanta Resources gained 2 percent to 606.50 pence as of 10:03 a.m. in London.

“The minority shareholders who invested in the stock taking a view on oil and gas, will have to submit to risks on other commodities or exit,” Tarun Lakhotia, analyst at Kotak Institutional Equities, said in a June 15 note. “The exit option through the proposed transaction, at current market prices, implies a value of 55 rupees per share for Cairn’s 70 percent stake in the Rajasthan block, well below our computed fair value of 104 rupees a share.”

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