India
Road Ahead”
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WHAT A DEAL !
Vedanta Resources Plc, the mining company controlled by billionaire Anil Agarwal,
agreed to buy as much as 60 percent of Cairn India Ltd. For $8.5- $9.6 billion to gain
access to India’s biggest onshore oil field.Edinburgh-based Cairn said the deal would
result in a substantial return of cash to shareholders. It added it would also use the cash
from the proposed sale for other exploration and drilling programmes.
Vedanta, which draws most of its revenues from India in mining and producing copper,
zinc and aluminium, may be the second global metals firm to expand into oil & gas after
BHP Billion to smoothen earnings fluctuations.
On 25th sep 2010, Govt seeks law ministry's advice on Vedanta deal. Cairn has written to
the petroleum ministry twice on the deal, after its chairman, Bill Gammell, was asked to
apply for approvals under the various production sharing contracts the company
signed with the government, while the government asked Cairn to apply for permission
under various PSCs The contract with Vedanta Resources Plc is at shareholder level of
Cairn India, involving sale of shares – (and) there is no change to the Participating
Interest in any of the PSCs to which the Cairn India Group is party.
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Ever since the deal was announced on August 16, the petroleum ministry and ONGC had
been asserting it could not go through without their approval. The Edinburgh-based Cairn
Energy Plc decision to sell stake in Cairn India to the Vedanta group saw, ONGC
asserting its pre-emptive right on the blocks the two companies manage along with
companies.Though any chance of a counter-offer being made by ONGC has been ruled
out.
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Founded in 1976 by Mr. Anil Agarwal
Vedanta Resources plc is a diversified metals and mining company with revenues in excess of
US$6 billion based in London. They are the first Indian manufacturing company to be listed on
the London Stock Exchange. They have operating locations in India, Zambia and Australia.
They are headquartered in London and have over 30,000 employees including over 8,000
professionals worldwide. Vedanta group structure is as follows:
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VEDANTA’S TIMELINE:
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Strategic Diversifications:
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Sterlite Industries 1988 Copper
MALCO 1995 Aluminum
BALCO 2001 Aluminum
Hindustan Zinc Limited 2002 Zinc
Konkola Copper Mines 2004 Copper
Sesa Goa 2007 Iron
Cairn India 2010 Oil
o In 1979, Mr. Anil Agarwal acquires, through a family firm, Shamsher Sterling
Corporation.
o In 1986, Sterlite Cables Limited, acquires the Shamsher Sterling Corporation
business and changes its name to Sterlite Industries (India) Limited.
o In 1988, Sterlite Industries (India) Limited makes an Initial Public Offering of its
Shares and Convertible Debentures.
o In 2000, MALCO acquires 38.8% interest in India Foils Limited.
o In 2001, It Acquires a 51% interest in BALCO from the Government of India.
o In 2002, It Acquires a 26% interest in Hindustan Zinc Limited, from the
Government of India and a further 20% interest through an open market offer.
o In 2003, It Acquires a further 18.9% interest in HZL following exercise of a call
option granted by Government of India. Also in 2003, It Becomes the first Indian
Company to list on London Stock Exchange.
o In 2004, Vedanta Resources acquires 51% stake in Konkola Copper Mines in
Zambia
o In 2006, It Acquires Sterlite Gold
o In 2007, Vedanta acquires 51% controlling stake in Sesa Goa Limited, India's
largest producer-exporter of iron ore
o August 2010, Vedanta Resources announces its plans to buy a Controlling Stake
in Cairn India Ltd.
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CAIRN ENERGY:
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Sir Bill Gammell current Chief Executive of Cairn energy
Cairn Energy plc, 1981, is a global oil and gas exploration company based in Edinburg, UK.
Proven Commercial Reserves of 247.4 million Barrels of Oil. They have Operational Interests in
Albania, Greenland, India, Nepal and Tunisia. It gets 95% of revenue from its Indian operations.
Cairn is expected to raise $8.48 billion from this stake sale.
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Rahul Dhir , CEO and MD Cairn India ltd.
Cairn India Ltd. Formed in 2006. Cairn Energy maintains a 62.36% stake in the company. Listed
on BSE and NSE on January 9, 2007 .In 2008, Govt. of Sri Lanka awarded an exploration
license in Mannar Basin to Cairn India Ltd.. Market Capitalization of 63,257 crores (as per
closing price on BSE on September 7, 2010)
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Cash Flow from Operations:
VEDANTA-CAIRN DEAL
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The Vedanta Group has offered to acquire 40-51% stake in Cairn India.The Anil Agarwal-
managed, London-based Vedanta Resources on 16th august 2010, Monday entered the oil
sector, announcing that it will acquire stake in Cairn India, ruffling feathers of state-owned Oil
and Natural Gas Corporation
Price offered to promoters of cairn energy is 405/share (including 50 per share as non-
compete fee), where 22% is paid as premium.(Non Compete fee: The fee is paid by the acquirer
to the promoters of the target company for not entering the same trade, and such payments could
be as high as up to 25 per cent of the deal value)
Further, Vedanta has announced an open offer (from 11 Oct ’10) of 20% stake in Cairn
India from minority shareholders which will be done by its group company Sesa Goa. The price
offered is 355 per share for the open offer. Total Consideration is from US$ 8.5bn to US$ 9.6bn.
Transaction consideration is payable on completion of the deal that is expected to be completed
by Q1 2011.
Spreading wings
Branching Out : Vedanta has been scouting for possible buys in the oil and gas sector for the
past two years, in an attempt to diversify from its core metal play.
Deep Pockets : With cash reserves of about $7.5 billion, Vedanta is seen well placed to pick up
a stake.
Digging Deep : Cairn Energy Plc is looking to raise funds for its plans to drill exploration wells
off the coast of Greenland.
Options Open : Cairn Energy Plc is reportedly in talks with other companies, including large
Indian and global resource firms, as part of its plan to raise funds for future expansion.
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Chasing BHP Billiton:
With this deal, Vedanta is looking to become a company with the scale of something like BHP
Billiton. It shows the company wants to be become a major resources player. In a way, Agarwal
is following in the footsteps of Australian mining giant BHP Billiton, or even fellow NRI
Lakshmi Mittal, who had already tied up with India’s largest oil and gas company, ONGC, to
hunt for oil exploration assets overseas. Mittal has also revived plans to build a 9-million tonne
oil refinery in landlocked Punjab. Even the Tatas have diversified into oil via Tata Petrodyne.
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Funding:
The Vedanta group had net cash and cash equivalents of $7.2 billion (Rs 33,120 crore) as on this
March, of which $3.13 billion (Rs 14,380 crore) was in the books of Sterlite Industries and $1.09
billion in Sesa Goa (another India-listed subsidiary). 20% has to be open offer by sesa goa.
Sesa Goa has cash reserve surplus, in addition to there planned capital expenditure. Sesa Goa
had no immediate plans to acquire any iron ore mines. This surplus was getting 5% return only.
So these cash reserves can be used for better returns. There is no lock-in period for Sesa go for
its investment Use of such reserve would not disturb future plans of sesa goa to buy other iron
mines.
Bank debt facilities of up to US$6.5bn, ≥ 2 Years tenure. Sesa Goa: US$3bn, primarily from
cash reserves. With the deal reaching advanced stage, Vedanta had already tied up close to $4
billion (Rs 19,000 crore) of funding from three leading banks. Goldman Sachs, Barclays and
JPMorgan have agreed to finance the deal via a combination of dollar and pound debt.
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Synergy and Benefits:
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• Government concerns
– Vedanta's lack of competence oil sector
– Might end up hurting the promise for the sake of short-term gains
• The deal requires approval from only Securities & Exchange Board of
India (SEBI) and Reserve Bank of India (RBI).
• According to clause 28.2 of the model production-sharing contract, companies that have
acquired exploration blocks under the New Exploration Licensing Policy need to inform
the government of any change in shareholding pattern
EXISTING
OPERATIONS
RAJASTHAN %
Cairn
70.0
(Operator)
ONGC 30.0
CAMBAY
Cairn
40.0
(Operator)
ONGC 50.0
Tata
10.0
Petrodyne
RAVVA
Cairn
22.5
(Operator)
ONGC 40.0
Videocon 25.0
Ravva Oil 12.5
SUMMARY OF TRANSACTION
Transaction Highlights
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Cairn to sell a maximum of 51 per cent of Cairn India to Vedanta
A premium of approximately 32 per cent to the Cairn India average closing price for 90
days prior to 14 August 2010
Put and call options, exercisable after July 2012 and July 2013, to ensure a majority
interest in Cairn India can be sold (exercisable at US $8.66 (INR 405))
Intention to return a substantial proportion of the proceeds from the transaction to Cairn
shareholders
Retained cash will provide Cairn with financial flexibility to pursue an active exploration
programme in its leading acreage position in Greenland and future growth opportunities
Vedanta will make an open offer to Cairn India shareholders, at not less than INR 355,
for up to 20 per cent of the issued shares in Cairn India, in accordance with the
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requirements of the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations,
1997 (the “Open Offer”) (Cairn will not participate in the Open Offer)
The number of Cairn India shares capable of being sold to Vedanta by Cairn may be
scaled back depending on the results of the Open Offer, subject to a minimum of 40 per
cent of the fully-diluted share capital of Cairn India at completion being acquired
pursuant to the Proposed Transaction
Expected initial consideration of between US $8,480m (51 per cent sold) and US
$6,651m (40 per cent sold)
Completion of the Proposed Transaction will occur following the closing of the Open
Offer
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• Many would argue the journey from bulk commodities to energy (coal, power and now
oil) is a natural progression. It’s already in downstream energy with interests in power
generation, so picking up stakes in gas blocks could be backward integration to fuel his
power projects. “Cairn was a natural step for us.
• To create a diversified portfolio that can generate enough cash to fund complex
and large projects in cyclical businesses. Agarwal calls it his “Four-Box Strategy”: sweat
existing assets to become a low-cost producer; pump cash into greenfield and mega
brownfield expansions using modern technology and low capex; maintain a robust and
fully-funded balance sheet; and tap inorganic “blue sky” opportunities to leverage
homegrown skill sets
REFERENCES
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http://www.commodityonline.com/news/Mining-giant-Vedanta-to-buy-Cairn-Energy
%E2%80%99s-India
http://www.businessweek.com/news/2010-08-16/vedanta-to-buy-stake-in-cairn-india-for-
as-much-as-9-6-billion.html
http://www.hindustantimes.com/Vedanta-to-sign-3rd-largest-deal-by-Indian-
firm/Article1-587839.aspx
http://smartinvestor.in/market/story-38613-storydet-
Vedanta_gets_banks_nod_to_fund_Cairn_deal.htm
http://www.cairnindia.com/Media/PressRelease/16.08.10_Cairn_Vedanta.pdf
http://www.business-standard.com/taketwo/news/cairn-will-test-agarwals-4-box-
plan/408100/
http://www.vedantaresources.com/
http://www.cairnindia.com/Pages/default.aspx
http://lite.epaper.timesofindia.com/getpage.aspx?publabel=ET&city=Delhi
http://www.business-standard.com/india/news/govt-seeks-law-ministry%5Cs-
advicevedanta-deal/409125/
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