Vedanta Cairn Merger Fair, but deal dynamics could change

Transcription

1 For Internal Use 2014 Only IiAS. Not All For rights External reserved. Distribution Vedanta Cairn Merger Fair, but deal dynamics could change 15 June 2015

2 Deal is fair for both sets of shareholders For Vedanta For Cairn Get access to Oil & Gas assets of Cairn India at attractive valuations The share price of Cairn India has fallen sharply in the last one year. Currently the multiples for Cairn India are low compared to peers; the assets are therefore inexpensive Company P/E (x) P/BV (x) Reliance ONGC Cairn India Better Capital Allocation Credit quality of the combined improves, enabling easier refinancing of debt. Better capital allocation, resulting in better return ratios Exposure to metals and mining assets Get access to low cost, longer life assets Diversified product portfolio will help ride cyclical downturn of oil prices and lead to stable cash flows Buffer to absorb contingent liabilities The increased balance sheet size will lead to greater financial flexibility The improved financial strength will provide an additional buffer to absorb the impact of contingent liabilities 2 For Internal Use 2014 Only IiAS. Not All For rights External reserved. Distribution

3 Integrated Mining Mining + Petroleum: Rare, but not unprecedented BHP Billiton The largest integrated natural resources player in the world: generates 22% of its revenues from the petroleum business Started exploration in Trinidad and Tobago offshore in 1996 Stable cash flows from petroleum business Entered shale gas business in 2011 Freeport- McMoRan One of the largest copper producers in the world Had an oil business, which was hived off into a separate unit in 1994 In Dec 12, it merged its oil business and purchased another oil exploration company to replicate the BHP Billiton model Rio Tinto Vale Vedanta BHP Billiton Freeport 0% 20% 40% 60% 80% 100% Petroleum Ferrous Metals Base Metals Others 3 For Internal Use 2014 Only IiAS. Not All For rights External reserved. Distribution

4 Premium for Cairn: Good, but not great The 1:1 swap ratio, along with the redeemable preference shares, implies a premium of 7.3%, which is lower than acquisitions in the same industry in the past Acquirer Target Year BHP Billiton (Integrated) Acquisition Price ($ bn) Premium (%) Mode Petrohawk (Petroleum) Cash Vedanta (Mining) Cairn India (Petroleum) Cash Freeport-McMoRan (Mining) Similar acquisitions in the past Plains Exploration & Production Co (Petroleum) Vedanta (Mining) Cairn India (Petroleum) Cash + Stock Stock + Preference share However, the valuation still seems fair for Cairn India shareholders because: It takes into account an improvement in oil prices going forward Unlike the acquisitions referred above, where the premium took into account a change in control, in this case Vedanta is already the controlling shareholder 4 For Internal Use 2014 Only IiAS. Not All For rights External reserved. Distribution

5 Success of the deal is contingent on. For Vedanta Cairn India s Income tax liability of Rs200 bn does not materialise For Both Companies Oil and Commodity Prices continue to trade in the same range For Cairn Consent from Cairn UK and LIC Cairn UK and LIC holding aggregates to roughly 50% of the aggregate public shareholding They may not be happy with the valuation, especially given the recent fall in share prices Further, they might view Cairn India as a strategic player in the Indian petroleum industry and may not want to own a diversified portfolio of assets If oil price and commodity cycles begin moving in opposite directions going forward, the valuation dynamics will change, resulting in any one set of shareholders possibly vetoing the deal 5 For Internal Use 2014 Only IiAS. Not All For rights External reserved. Distribution

6 Shareholders of both companies will have a say Both companies have to approach the courts to approve the transaction Shareholders will be asked to provide their consent through two modes: Court Convened Meeting (CCM) and Postal Ballot (PB) Court Convened Meeting Postal Ballot Required by Courts SEBI Voting by promoters Allowed Not Allowed Votes required 75% 50% E-Voting Facility Not Mandatory Yes In the Postal Ballot, since promoters will not get to vote, the Voting Multiplier effect kicks in: given the 40% ownership of minority investors in both companies, each share will be equal to 2.5 votes 6 For Internal Use 2014 Only IiAS. Not All For rights External reserved. Distribution

7 For Internal Use 2015 Only IiAS. Not All For rights External reserved. Distribution Markets Governance markets governance 15 F/ West Wing, P J Towers, Dalal Street, Fort, Mumbai: T: E: solutions@iias.in