Good Morning,
The proposal, Vedanta Limited (VED Ltd) and Cairn India
are to benefit by the merger. Vedanta Resources (VED) ownership in VED Ltd "may" be diluted to 50.1% from its current 62.9% holding.
Cairn India’s implied premium is 7.3%, not exactly enticing
even allowing for the 7.5% Redeemable Preference Share. The alleged sweetener
and merger is on the basis the deal is “allegedly” going to be tax neutral.
Its over to the minority holders of Cairn India to a) accept
it b) hold up for an improved offer or b) worse the Indian government take a
‘different’ view on the valuation. If either happen, VED has serious issues
with much needed cash, their financial covenants are in tatters.
The biggest argument for the merger is allegedly to add “protection
in diversity” in the business model. Quite why there’s a benefit to
those “oil” investors that allegedly get exposure to “tier 1” assets is another
story. The real benefit is the cash for VED (and associated entities) whom will
also benefit from the re-rating.
Assuming all goes well, tax neutrality, and shareholder
support, VED will be well placed. The question why Cairn India holders would
want it, whether there’s a viewpoint of a bottom in commodity cycle taken or
hope of recovery (overall). After all, VED Ltd has had all its
profit depleted by the commodity cycle. Aluminium en par with the collapse in
oil, although oil has made some recovery.
VED’s entire structure is not out of the woods yet. VED Ltd
need more cash than just “Cairn India’s” and the likely merger of Hindustan
Zinc Ltd (HZL)(64.9%) that has near $1.5B
in cash and Bharat Aluminium Company Ltd (BALCO) that has circa $1B in
cash. The issue will be the Indian Government still has a near 29.5% holding in
(HZL) and 49% in BALCO.
A recent enquiry has
just been dropped in respect of how “certain entities” including VED Ltd
obtained their stake in HZL. This also included concerns over the price paid,
which one might consider laughably cheap. Amazingly, Indian Government might
not be so willing to let the remaining stake go as cheaply or without a special
dividend.
The sticking point is VED Ltd believe they have call options
HZL and BALCO. Whereas the Indian Government don’t recognise nor consider these
call options legal or valid. Whether the Indian Gov want to sell out their
remaining 29.5% share in HZL and 49% in BALCO is another matter, or whether
they want shares in VED Ltd. Admittedly the government have included the sale /
proceeds of BALCO and HZL in their fiscal budget for next year (2016).
The Indian Government would be wise to convert the holding
into VED Ltd, not only diluting VED’s UK holding/shareholders sub 50% perhaps
more 35% (based on approximate valuations). The control benefits would be
obvious…
A pure cash grab, whether BALCO and HZL are converted/merged
remains a matter for the Indian Government demands/terms. Perhaps VED Ltd would
be wise to maintain the current status quo, especially after the coal debacle
in BALCO.
Over to those “minorities” to decide the outcome, perhaps
determined over the weekend, VED will have to work hard to even justify
anything near 600 pence.
Its accepted that there's a confidentiality arrangement with regard to the international proceedings between the Republic of Uzbekistan and Oxus. Normal caveats to the risks associated with gossip, there appears to be some speculation in Uzbek, that negotiations are currently taking place between the two parties. Perhaps the company would like to clarify this. Whether these mutterings are speculators tired of the proceedings taking an inordinate length for award or not, one suspects they have a sniff of truth about them.
Atb Fraser
