By Shantanu Guha Ray
DAYS BEFORE Anil Agarwal inked the $8.48 billion deal to acquire most of the 62.4 percent stake in Cairn Energy’s Indian subsidiary, his advisers informed the stocky billionaire of an impending crisis enveloping his mining operations in Orissa. He was told that an Indian government panel could eventually scrap the $7.6 billion project, for violating environmental norms.
But the 56-year-old Agarwal, who heads the London-listed Vedanta Resources, remained unfazed — despite knowing well that the deal was politically sensitive, and that he did not have Petroleum Minister Murli Deora on his side. Also, the law ministry had several unresolved issues with Vedanta’s India operations, and the environment ministry had more dossiers on it than on any other company operating in the country.
Yet, amid all the uncertainties, the only constant for Vedanta Resources was its ambition to become the world’s third largest diversified miner after Anglo-Australian BHP Billiton and Rio Tinto. That was its sole interest in entering the ‘great game’, a global euphemism for acquisitions of hydrocarbon assets. Having failed to acquire similar assets in African nations like Ghana, Angola and Nigeria, Agarwal knew the importance of the Cairn deal.
“The proposed acquisition enhances Vedanta’s position as a natural resources leader in India. Cairn India’s Rajasthan asset is world-class in terms of scale and cost, delivering strong and growing cash flow,” the executive chairman of Vedanta Resources said in a teleconference from London with reporters in India.
The Cairn buy will give Vedanta a hydrocarbon footprint and make it a challenger to Reliance
As television channels flashed news of Agarwal’s big bid — some even comparing it to Tatas’ acquisition of Corus, Jaguar and Land Rover — tensions ran high in New Delhi. RS Sharma, chairman of the Oil and Natural Gas Corporation (ONGC) — a Cairn India partner — fired the first salvo, wondering why the stateowned oil and gas company was not offered the first right of refusal. “This is certainly not a deal. Vedanta cannot walk over us,” said Sharma.
He was supported by Petroleum Secretary S Sundareshan, who said the government was yet to endorse the buyout. “We are not ruling out a counter-bid by ONGC,” Sundareshan told TEHELKA, shortly after Cairn Energy chief executive Sir Bill Gammell — realising the challenges facing the deal — spent over an hour with Petroleum Minister Deora. While he refused to comment, his deputy, Jitin Prasada, took the diplomatic line: “The deal has to come to the government, and once it happens we will take a call… The country’s energy security is paramount.” In plainspeak, this means New Delhi has the right to approve or refuse to accept change in ownership.
Another player that could queer the pitch for Vedanta is the Securities and Exchange Board of India (SEBI). As the deal stands, Vedanta would pay Rs.405 per share — including non-compete fees (a premium paid to the promoters of a target company) of Rs.50 per share — to buy up to 40 percent of Cairn’s Indian arm; while the open offer price for an additional 20 percent has been fixed at Rs.355. Any acquirer buying a stake of at least 15 percent must make an open offer to other shareholders for an additional 20 percent stake. Thus Vedanta, on completion of the open offer, could end up controlling up to 60 percent of Cairn India at an investment of $9.6 billion.
nformed sources told TEHELKA that Gammell, who was eager for the cash, was also worried about Deora and other ministers queering Vedanta’s pitch, ostensibly because being a big player in the Indian hydrocarbon sector means taking on the powerful Reliance Industries.
Also weighing on Gammell’s mind was the fact that the Indian government was displeased at the way Cairn — it once wanted to sell the stake to Reliance — did not inform various ministries at every step before inking the big-bucks sale.
But last month, a SEBI-appointed panel proposed sweeping reform of takeover regulations. One of the key changes suggested, involves the noncompete fee, which, if implemented, will bar acquirers from paying the promoters of the target company a premium over the price offered to minority investors. The panel had also proposed that the acquirer company must not purchase just a controlling interest — or a stake above 50 percent — but make an open offer for the entire 100 percent stake in the target company. In short, SEBI — if it wants — can play spoilsport.
Expectedly, the dealmakers are tense. Agarwal does have big connections. But analysts say that Vedanta, which has interests in mining iron ore, bauxite, copper and the like, is in serious crisis in India over routine environmental violations at its Orissa mines. The Cairn buy, then, will land Vedanta a clean project, enhance its image and allow it entry into the hydrocarbon sector.
The deal holds other tangible benefits. The Mangala field in Rajasthan’s Barmer district, close to the Pakistan border, is Cairn India’s most important asset. The Scottish company had paid $7 million in 1997 for the property in Rajasthan that Royal Dutch Shell thought was dry.
But when a discovery was eventually made in January 2004, it was India’s largest oil find in 22 years and transformed Cairn from a mid-size explorer into a FTSE 100 company; and Cairn India into the country’s fourth largest gas explorer by virtue of its $14 billion valuation. Thus, while a lot hinges on the deal for Vedanta, it is equally crucial for Cairn. Analysts fear, with this sale, the Edinburghbased explorer could downgrade to a mid-cap stock after the sale again. But Gammell says he needs the cash to have greater leverage on residual assets, the largest of which lies near the Davis Strait off Greenland’s shores. Global consultancy firm Wood Mackenzie estimates there could be 20 billion barrels of oil and gas in that country.
For Cairn, selling its Indian asset will free funds to concentrate on its residual assets
BUT DAYS after the deal was announced, criticism is as trenchant as the optimism surrounding the proposed buyout. Analysts have questioned its valuation because the retail investors have been offered a bad deal. “It’s unfavourable from a minority shareholder’s point of view because of a limited rationale in paying a non-compete fee for a commoditised business,” according to Hemen Kapadia, a Mumbai-based analyst. Kapadia says Cairn India’s public shareholders, representing 37.64 percent of its paid-up equity, could have earned Rs.3,570 crore, had the non-compete premium been extended to them as well.
Further, credit rating agencies downgraded Vedanta because it will have to seek $6.5 billion in loans to finance the acquisition. Fitch downgraded Vedanta from ‘BBB-’ to ‘BB+’ while Standard and Poor’s (S&P) placed Vedanta’s ‘BB’ long-term corporate credit rating and “the rating of all the company’s issues on Credit Watch with negative implications”. At the same time, Moody’s Investors Service placed Vedanta’s rating under review for a possible downgrade.
Clearly, Vedanta’s owners will have to wait awhile before they can pop the bubbly.