Mumbai: Vedanta Resources Plc on Sunday announced the merger of its two Indian units—Vedanta Ltd and Cairn India Ltd—in a move that will unlock about $2.6 billion in cash for its debt-laden parent.
For each stock held, shareholders of Cairn India will receive one equity share and one redeemable preference share of of Vedanta Ltd, according to the transaction. The transaction represents a 7.3% premium to Cairn India’s Friday’s closing stock price and is expected to be completed by the end of March.
A merger between the two units makes it easier for the Vedanta group to access Cairn India’s cash reserves. The merger may, however, face a roadblock because of a `20,000 crore tax demand pending on Cairn India by the income tax authorities.
On 10 June, Mint reported that the key reason for merging Cairn India with Vedanta Ltd is because of its cash reserves. Cairn India had cash and cash equivalent of `16,867 crore as on 31 March. In 2014-15, Cairn India reported revenue of `14,646 crore and a net profit of `6,541 crore.
Last July, Vedanta had spooked investors when the company said it had taken a loan of $1.25 billion (around `7,900 crore) from Cairn India to pare down the debt of an unlisted subsidiary. Vedanta Ltd currently has a debt of `37,636 crore.
Both Cairn India and its erstwhile parent Cairn Energy Plc were issued tax notices of `20,000 crore and `10,000 crore respectively in March for failure to pay capital gains tax when some assets of Cairn Energy were transferred to Cairn India. The matter is currently in court.
After the completion of the merger, parent Vedanta Resources’ ownership in Vedanta Ltd is expected to drop to 50.1% from its current 62.9% while Cairn India’s minority shareholders will own 20.2% and Vedanta Ltd’s minority shareholders will own a 29.7% stake in the combined entity.
Vedanta Ltd will continue to be publicly traded on BSE and NSE, with its American Depositary Shares listed on the New York Stock Exchange. Cairn India’s BSE and NSE listings will be cancelled following completion of the reverse merger.
Explaining the rationale for the merger, Carin India and Vedanta, in a joint statement. said it will improve the ability to allocate capital to the highest return projects across the portfolio.
The statement said the transaction will contribute to further streamlining of internal processes and improved productivity, beyond the previously announced $1.3 billion. A stronger balance sheet will allow for the overall cost of capital to be reduced and the merger will helps to be consistent with stated corporate strategy to simplify the group structure.
Tom Albanese, chief executive of Vedanta Resources, said this transaction consolidates Vedanta’s portfolio of tier-I assets which, combined with strong management, will deliver superior returns for all shareholders.
“It will result in improved financial flexibility to allocate capital to the highest return projects and sustain strong dividends. The combined entity is uniquely positioned to help unlock India’s wealth of world-class energy and mineral resources,” Albanese said.
Mayank Ashar, chief executive officer of Cairn India, said the merger with Vedanta will generate additional value for shareholders and derisks Cairn India by providing access to a portfolio of diversified Tier-I, low cost, long-life assets, to deliver significant near-term growth.
Source: Mint; 14 June 2015