Relationship with Vedanta Limited

Transcription

1 The Boards of Vedanta Limited (Vedanta) and Cairn India Limited (Cairn) approved the proposal of merger of Cairn into Vedanta. As per the proposal, minority shareholders of Cairn will receive one equity share and one 7.5% redeemable preference share of face value Rs. 10 in Vedanta for each equity share held in Cairn. Minority shareholders own 40.12% stake in Cairn India while Vedanta owns the remaining 59.88% in Cairn India. SOCIALIZING THE DEBT OF VEDANTA LIMITED Total debt attributable to Vedanta Ltd is ~Rs. 74,000 Crore which includes: Rs.37,636 Crore of standalone debt Rs. 26,850 on the books of 100% subsidiary Twin Star Mauritius Holdings Limited taken for acquisition of Cairn Rs. 6,541 Crore of 100% subsidiary Talwandi Sabo Power Ltd. The detailed debt-structure as of March 31 st 2015, as per the company, is shown in the table below: Sl. Name of the Company Relationship with Vedanta Limited Vedanta's stake Debt (Rs. Cr.) 1 Vedanta Ltd Standalone ,636 2 Hindustan Zinc Limited Listed Subsidiary 64.92% - 3 Cairn India Listed Subsidiary 58.85% - 4 BALCO Subsidiary 51.00% 5,456 5 Talwandi Sabo 100% Subsidiary 100% 6,541 6 Twin Star Mauritius Holdings 100% Subsidiary 100% 26,850 7 Others Subsidiaries 74%-100% 1,269 Cairn India is a debt-free company. As a result of this merger, public shareholders of a debt-free Cairn will become shareholders of a heavily levered Vedanta Limited. In other words, the merger will socialize the debt of Vedanta Limited across the minority shareholders of both Vedanta and Cairn India. However, the promoter Vedanta plc will continue to hold majority control (50.1%) over the combined entity. The table below shows how the debt will be socialized over a larger number of minority shareholders. INGOVERN RESEARCH SERVICES Page 1 of 5 June 2015

2 Category Vedanta Pre-Merger Vedanta Post-Merger # % # % Promoters % % Public Shareholders of Vedanta 365, % 365, % Public Shareholders of Cairn % 260, % Total Public Shareholders 365, % 626, % CAIRN INDIA SHAREHOLDERS INHERIT THE PROBLEMS OF VEDANTA ALUMINUM Vedanta Aluminum has been battling the activists for the refinery expansion in Orissa.Amnesty International has consistently highlighted human rights abuses associated with the operations of the Lanjigarh refinery, which commenced production in Vedanta s bauxite mining plans in Orissa have been facing trouble. The minority shareholders of Cairn India will inherit these problems associated with Vedanta Aluminum. CAIRN INDIA PAYS FOR ACQUISITION DEBT The debt of Rs. 26,850 Crore with Twin Star Mauritius Holdings was acquired by Vedanta Limited from Vedanta plcat the time of acquisition of 38.68% stake of Cairn India Limited. Vedanta plc used SPVs to acquire Vedanta Limited (erstwhile Sesa Goa and Sterlite India) and Cairn India. The debt taken for acquisition of Cairn India was kept in the books of the SPV rather than on the books of the parent, Vedanta plc. At the time of Vedanta Ltd. acquiring shares of Cairn India, the share purchase agreement stated that Vedanta Ltd. acquired 38.68% shareholding in Cairn India and associated debt of USD 6,000 mn by way of acquisition of the SPV. This way, Vedanta plc transferred the debt to acquire Cairn directly to the shareholders of Vedanta Ltd. In July 2014, Cairn India had extended loans of approximately USD 1.25 billion (~Rs. 8,000 Crore) to a foreign subsidiary of Vedanta Limited - most likely Twin Star Mauritius Holdings the Cairn acquisition SPV. InGovern had red-flagged the transaction due to lack of fair disclosure and it not being in the best interest of the Company to enter into such a transaction. Many public shareholders too had voiced their concerns regarding the transaction.theloan of USD 1.25 billion will stand extinguished due to the merger of Cairn with Vedanta. Now, Cairn India s cash balance of Rs.17,000 Crore will be utilized to pay off part of the acquisition debt. As the Rs. 8,000 Crore of loan extended by Cairn India to Twin Star is waived off due to the merger, Cairn India has ended up paying Rs. 25,000 Crore of the Rs. 26,850 Crore of the acquisition debt. INGOVERN RESEARCH SERVICES Page 2 of 5 June 2015

3 CREEPING ACQUISITION BY VEDANTA PLC LED TO MAJORITY CONTROL OVER MERGED ENTITY As a result of the merger, the ownership of Vedanta plc in Vedanta Ltd will decrease from current 62.9% to 50.1% shareholding. We find that the stake of Vedanta plc in Vedanta has increased by 4.56% within a period of 1 year. 120% 100% 80% 41.69% 39.59% 37.49% 37.12% 37.13% 60% 40% 20% 0% 58.31% 60.41% 62.51% 62.88% 62.87% Mar-14 Jun-14 Sep-14 Dec-14 Mar-15 Promoter (Shares + ADRs) Public (Shares + ADRs) In case, these acquisitions had not taken place during the past 1 year, Vedanta plc s ultimate stake in the combined entity would have been lesser than 50% making them a non-majority controlling shareholder. Vedanta plc is likely to have done this to maintain control and to maintain Vedanta Limited as a subsidiary. POTENTIAL LIABILITY ON VEDANTA S SHAREHOLDERS: CAIRN S RS. 20K CR. TAX LIABILITY Cairn India has a tax liability of ~Rs. 20,000 Crore towards the Govt. of India, a matter which is sub-judice. Any adversarial outcome for the Company will result in a significant cash outflow for Vedanta impacting its business and operations. The management claims that a probability has been assigned to the outcome of this tax dispute with the Revenue office of the Indian government. TIMING OF THE MERGER: CAIRN INDIA S LOSS IS VEDANTA S GAIN The merger has been proposed when shares of Cairn are trading at the lowest price over duration of 5 years. In fact the share price of Cairn has more than halved over a period of 1 year. Cairn s shares were trading at Rs. 366 a year ago on June 16 th 2014, while they are currently trading at Rs. 183 per share. Although the loss in market capitalization of Cairn India is attributable to fall in oil prices, the timing of the merger indicates public shareholders of Cairn India will have to undertake a massive write-off on their investment in Cairn India due to this merger. INGOVERN RESEARCH SERVICES Page 3 of 5 June 2015

4 SUMMARY While continuing to maintain control of Vedanta Limited, Vedanta Plc. has managed to socialize the debt of Rs.74,000 Crore debt of Vedanta Limited, as the number of minority shareholders have increased from 365,905 to 626,783. The problems of Vedanta Aluminum would cascade onto the minority shareholders of Cairn India. Out of the acquisition debt of Rs.26,850 Crore of Vedanta Limited, Cairn India would have paid for Rs.25,000 Crore. The minority shareholders of Vedanta Limited gain at the detriment of the minority shareholders of Cairn India. Contact Mr. Shriram Subramanian, Managing Director Mr. Soumya Dash, Analyst Office: INGOVERN RESEARCH SERVICES Page 4 of 5 June 2015

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