MUMBAI: Large investors and some leading brokerages slammed the proposed merger of oil producer Cairn India into the metals and mining conglomerate Vedanta as a big negative for minority shareholders.
One day after Vedanta announced the move, institutional investors panned the deal but a negative vote against the merger is unlikely because of close business links between many funds and Vedanta group companies.
“I hold Cairn India in my portfolio schemes and I see this merger with Vedanta as detrimental for minority shareholders,” said a fund manager of a large mutual fund house, who did not want to be identified.
Vedanta announced on Sunday that Cairn India was merging with itself to create a natural resources conglomerate that would produce everything from aluminium and copper to crude oil. Shareholders would receive one Vedanta share for every Cairn India share held and one preference share with a coupon of 7.5 per cent. Vedanta, which is struggling to reduce its debt of Rs 77,000 crore, will get access to Cairn’s cash pile of Rs 17,000 crore once the deal is approved.
Cairn investors fear that the firm’s cash would be used to pay off Vedanta’s debt and that it would inherit the problems of a large mining conglomerate, which is fighting environmental activists over an aluminium project in Odisha. “As a mutual fund manager, if asked I would vote against the Vedanta-Cairn merger.
Cairn investors fear that the firm’s cash would be used to pay off Vedanta’s debt and that it would inherit the problems of a large mining conglomerate, which is fighting environmental activists over an aluminium project in Odisha.
“As a mutual fund manager, if asked I would vote against the Vedanta-Cairn merger. The minority shareholders of Cairn India are at a loss, given the huge debt of Vedanta as well as risk of global metal underperformance,” said a fund manager, who wanted to remain anonymous.
LIC owns 9 per cent and Cairn Energy Plc owns 9.8 per cent in Cairn India. Proxy advisory firm InGovern termed the transaction an attempt to “socialise the debt of Vedanta Ltd” while brokerage firm Barclays said that the risk-reward is more favourable to an independent Cairn than a merged Vedanta.
“Cairn’s minority shareholders get a raw deal after its merger with Vedanta. The share swap ratio of 1:1 is not favourable as the company is giving up its large cash on books for huge debt,” said a fund manager of a mutual fund house on condition of anonymity.
VEDANTA DEFENDS MOVE
Vedanta refuted such suggestions and said that this is a win-win deal for all shareholders. “The combination of the two Indian entities will, in fact, benefit Cairn India’s minority shareholders,” said Tom Albanese, CEO of Vedanta Ltd.
But many mutual funds may not oppose the deal outright as Vedanta group companies have made substantial investment in various debt schemes of many funds. “Any opposition by mutual fund asset management companies in Vedanta-Cairn merger deal means losing business, hence nobody wants that risk,” said CEO of a large mutual fund asset management company, who is nevertheless opposed to the deal.
Cairn shares rose 3.18 per cent to end at Rs 186.5 on technical factors as investors calculated the impact of a forthcoming dividend and the 7.5 per cent coupon on the preference share. The merged entity is likely to trade at about Rs 235 per share based on valuations, according to Deven Choksey, managing director of KR Choksey Shares and Securities.
If you add the dividend that is already been declared, the returns from holding Cairn shares is likely to be high, at least 33 per cent, he added. Most investors, he added, are selling Vedanta shares and buying Cairn for this reason. Vedanta shares fell 1.5 per cent to Rs 181.05.
Minority shareholders have become important as new rules framed by market regulator Sebi in May 2013 mandate that any related party M&A in order to be operational should receive more than half the votes of public shareholders in its favour. This means that more than half the public shareholders of Cairn India (40 per cent) should vote to support the deal for the merger to be effective.
On Monday, Vedanta officials met LIC officials to press for their approval to the deal. LIC is likely to make up its mind in the next few weeks after analysing the deal and securing more information from the company.
Vedanta group chairman Anil Agarwal also met petroleum minister Dharmendra Pradhan to brief him about the transaction. Public sector oil firm ONGC is a partner in Cairn’s oil fields in Rajasthan.
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