MAC: Mines and Communities

London Calling scrutinises the latest gambit by India's "Al Capone"

Published by MAC on 2015-07-12
Source: Nostromo Research, Business Standard

The top dog of Vedanta Resources, Anil Agarwal, has embarked on yet another mission to enlarge his Indian empire, while at the same time attempting to slash his massive accumulated debt.

At the end of the 2014-2015 financial year, the London-listed congomerate was, according to the Financial Times (15 June 2015) in the red by no fewer than US$17 billion.

Two and a half years ago, Vedanta acquire Cairn India, an oil  firm owned by Britain's Cairn Energy.

Now, although it appears to be still "cash rich", Cairn India's  share value has collapsed by 50%.

Meanwhile, in August 2013, Mr Agarwal merged his Indian Sesa Goa assets (mostly in iron ore) with those held by Sterlite Industries, re-naming the new edifice, Vedanta Ltd, and registering it in India. At present, Vedanta Resources in London still holds a majority 63% share of Vedanta Ltd.

Sling shot

A major challenge for Agarwal is how to minimise his parent company's debt, while also boosting Cairn India's market value.

"Killing two birds with one stone" is something Anil Agarwal has been adept at all his business life.

He did so spectacularly in late 2003 when he brought Sterlite industries to Britain, presenting it as a viable, thriving enterprise (which it wasn't in many respects) under the guise of Vedanta Resources. This was a brazen (fundamentally fraudulent) move that seduced investors into buying the second largest tranche of funding that year in a company making an Initial Private Offering (IPO) on the London Stock Exchange.

For background, see: A London Calling Special - 10 January 2004 

So what next?

Now, Agarwal, and his buddy CEO Tom Albanese, plan pulling off an equally flagrant coup, employing similar sleight of hand.

They're proposing a merger between Cairn India and Vedanta Ltd, commending this to Cairn's shareholders as an unmissable opportunity to go well beyond just messing about in oil. Cairn India's own Indian Chief Executive has welcomed the proposal, saying it offers his company a partnership with  "India's national resource champion" (sic!)

If the ploy were to succeed, it would (suggests the Financial Times ) reduce Vedanta Resources' holding in Vedanta Ltd to 50% - something which may placate those who've long criticised Agarwal for exercising excessive domination over the company's corporate governance.

More importantly, the move should assist in reducing Vedanta's cadaverous burden of debt. (Just this week, it was revealed that Vedanta has suffered bigger trading losses in the past year than any of its Indian peers).

But there may be trouble ahead...

The minority shareholders in Cairn India are the UK's Cairn Energy, followed by the Indian state Life Insurance Corp (LIC). If they united, they could  scuttle a deal; some analysts have already poured cold water on it, suggesting it offers poor value for money.

Vedanta Ltd's shareholders may also be less than enamoured of the proposal, given India's income tax department has slapped a multi-billion rupee tax demand on Cairn India for failing to deduct withholding tax on capital gains, made at the time of Vedanta's acquisition of the oil company *.

Agarwal's initial  play for Cairn provoked a storm of opposition in India at the time. Critics argued that potentially the most valuable oil field in the country was being handed over, literally lock, stock and barrel, to a foreign company which had no previous experience of managing such assets, let alone extracting them for the benefit of Indian citizens.

See: How did Vedanta grab India's richest oilfields?

That claim has surely been born out over the past year.

This latest gambit serves to confirm longstanding accusations that Anil Agarwal will attempt to broker any strategy which bulwarks his own (and his family's) financial standing, and increase his control over India's natural resources, regardless of what harm this does to thousands of those living in Vedanta's path.

In just three weeks time (August 3rd) Vedanta Resources must face its own shareholders at their London annual general meeting.

It could -and surely  should -  be one of the stormiest yet.

*An historical note: Despite his committing numerous criminal acts, the only charge made to stick against Al Capone -  and which finally sent him to jail in 1931 - was one of tax evasion

[London Calling is published by Nostromo Research. Opinions expressed in this column are the author's, and do not necessarily represent those of anyone else. Reproduction is welcomed under a Creative Commons Licence]

Cairn India to get access to Vedanta's metal and mining assets: Vedanta Chairman

Says Vedanta's focus on improving returns will benefit Cairn India and its shareholders

Business Standard

11 July 2015

New Delhi - Cairn India will get access to Vedanta’s metal and mining assets, said Vedanta Limited Chairman Navin Agarwal while addressing the company’s 50th Annual General Meeting (AGM) today in Goa.

“Cairn India’s shareholders will get access to Vedanta Limited’s tier I metals and mining assets, which are well-invested, have low cost and long life,” he said.

He added that Vedanta’s focus on improving returns from core, existing operations in order to unlock value, will benefit Cairn India and its shareholders.

Anil Agarwal-promoted Vedanta Ltd on June 15 said it would merge its subsidiary Cairn India with itself for a larger natural resource play.

“We are committed to sustaining and enhancing the Cairn India brand and maximising its potential. Furthermore, the merger will provide more liquidity to the shareholders of the merged entity with a higher free float,” Navin Agarwal said today in the AGM.

According to Agarwal, the merger will also deliver significant economies of scale , including improved optionality to allocate capital, and will also strengthen the company’s engagement with the government and its sustainability initiatives.

In the all stock deal, each Cairn India shareholder would be offered an equity share of Vedanta Ltd, besides a 7.5% redeemable preference share of Rs 10 face value.

However, according to analysts, the merger would pave the way for Vedanta’s London-listed holding company, Vedanta Resources Plc, to lower its debt of close to Rs 76,000 crore.

Agarwal today also lauded the the steps taken by the government to revitalise the mining industry.

“The reduction in export duty on low grade iron ore and the enactment of the Mines and Minerals (Development and Regulation) Amendment Act, 2015, which provides continuity to our mining leases and which will bring transparency to future auction processes for mineral concessions, are all steps in the right direction,” he said.

An article published on June 22 2015, by Business Standard outlined the challenges Vedanta Ltd would face, if the Cairn India- Vedanta Ltd went ahead:

The merger of Cairn India with Vedanta was never going to be easy. Days after billionaire Anil Agarwal announced that he would merge the energy company into its parent, state-owned Life Insurance Corp (LIC), a minority shareholder of Cairn India, raised its concern over the valuation for the merger and the debt of the merged entity.

LIC owns 9.06 per cent of the cash-rich Cairn, which makes it the second largest minority shareholder after Cairn Energy which owns 9.82 per cent. Together, they represent a little less than half of the 40.12 per cent non-promoter stake in the company. For the proposed merger to go through, at least 50 per cent of the minority shareholders have to vote in favour of the deal. This makes a nod from LIC and Cairn Energy crucial.

Approvals needed

"The government has in the past vetoed the merger of Hindustan Zinc and Balco (group companies of Vedanta) and is still undecided on the sale of its residual stake in these two companies. It will be interesting to see how LIC, being government owned, will vote on the merger," Simone Reis, co-head (mergers & acquisitions and private equity ) of law firm Nishith Desai Associates, says.

Some have started to support LIC's stance that the merger is against the interests of the minority shareholders. Under the offer, the shareholders of Cairn India will receive one Vedanta share for every Cairn India share they hold and one preference share with a coupon of 7.5 per cent.

"The offer made to the minority shareholders is certainly poor as the sweetener of 7.5 per cent preference share redeemable after 18 months is miniscule. As it is, Cairn India shares have lost nearly 50 per cent value in the last one year and now locking the merger at this price makes it a really poor deal. I hope LIC continues to oppose (the merger) strongly," says Sriram Subramanian, managing director of proxy advisory firm

However, some analysts feel LIC may finally vote in favour of the merger. "Given its history, a strong stance for the longer period is not foreseen, although it would make sense if LIC does so this time. If LIC maintains its current position, it's going to be difficult for the Vedanta-Cairn merger to go through," says an analyst with a foreign brokerage.

Cairn India Chief Executive Mayank Ashar remains positive about the deal. "This deal is good for Cairn. The strategic rationale for this is that we go from having exposure to a single commodity to being part of India's national resource champion."

Cairn Energy, the other key minority shareholder, appears undecided on the merger. "We noted the announcement from Vedanta and will assess whether the proposal is in the interest of Cairn Energy as a shareholder in Cairn India in due course ," the company said in a statement.

That's not all. The demand made by the income tax department on Cairn India is another hurdle that Agarwal will have to clear during the merger. The department has slapped a tax demand of Rs 20,495 crore on the company for failing to deduct withholding tax on alleged capital gains made by its erstwhile promoter, Cairn Energy.

After the merger was announced, the department said it will defend the tax claim it has made on Cairn India, even after the company is merged with its parent. "Given that any transfer of shares held by Cairn Energy in Cairn India has been frozen by the tax authorities, Vedanta will need to seek permission from the authorities to issue Cairn Energy new shares to give effect to the merger," Reis says.

The tax demand could spook Vedanta shareholders who will inherit the liability , especially when the company is already laden with debt . "The Vedanta shareholders could raise concerns on this front," says Anand Prasad, partner of Mumbai-based law firm Trilegal.

Many obstacles

India's laws require Vedanta to take the High Court's permission before the merger, which some feel could pose a few problems. "Vedanta will have to provide adequate comfort to the courts that it has sufficient resources to make good the tax liability ," adds Reis.

The third crucial approval will have to come from the Union ministry of petroleum.

Vedanta will now have to seek the ministry's approval for changing ownership of all Cairn India's oil and gas assets , including the Barmer block in Rajasthan and the Ravva oil and gas field in the Krishna-Godavari basin. The Barmer block in Cairn's portfolio is the biggest revenue generator and its contract for the block is coming to an end in 2020. If the contract is not renewed, Cairn would have to return the field to state-run Oil and Natural Gas Corporation, which is the original licensee and holds 30 per cent stake .

The ministry would be concerned over the energy security of the country and would also want to know the merged entities' plans to invest in the sector and add reserves, especially when the motive of the merger is seen as access to Cairn India's cash to lower Vedanta's debt of over Rs 75,000 crore.

"There is the possibility that the petroleum ministry may bring in additional conditions which would include increase in profit share (currently 50 per cent)," says an analyst with a local brokerage .

With all these stumbling blocks, analysts as well as law firms say the merger would take more than a year to come into effect, contrary to Vedanta's estimate of six to eight months. "Assuming there are no challenges, such approvals usually take eight to ten months. Here, as we do see some hurdles, it may take about 12 months or a little more for the merger to become effective," says Giriraj Daga, portfolio manager with SKS Capital and Research.

Agarwal, for his part, is used to negotiating such challenges. When he merged Sterlite Industries into Sesa Goa to form Sesa Sterlite (now known as Vedanta), a creditor and an investor of Sesa Goa had challenged the order in the Goa bench of the Bombay High court. As a result, the merger, which was announced in February 2012, happened only in August 2013, after a whole year and a half.

Will this ride be easier?

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