Why Cairn India-Vedanta Deal is a Win-Win for Shareholders

Shares in Cairn India gained on Monday following the merger announcement with Vedanta Limited on Sunday. The deal will now have to be approved by regulators as well as by a majority of the companies' minority shareholders. Analysts told NDTV that the deal is a win-win for shareholders of both companies.

1) Both Cairn India and Vedanta Limited are owned by London-listed Vedanta Resources, controlled by billionaire Anil Agarwal. Cairn India is the country's top private sector oil producer, while Vedanta Limited specializes in mining.

2) Cairn India shareholders will get one share in Vedanta for every share held. They will also get one redeemable preference share in Vedanta with a face value of Rs 10, making the deal worth roughly $2.3 billion. That implies a premium of 7.3 per cent to Cairn's Friday close and a ratio of 1.04 for 1 and is better than expectations.

3) TS Harihar of HRBV Client Solutions told NDTV that minority shareholders of Cairn India have got a good deal. "Eventually, Cairn India will get delisted and Vedanta will get a lot of cash in their books," he added.

4) The deal will help parent Vedanta Resources reduce hefty debts. As of March 31, 2015, the standalone net debt of Vedanta Limited stood at Rs 36,796 crore, while Cairn India was sitting on a cash pile of Rs 16,867 crore.

5) Prakash Diwan of Altamount Capital Management told NDTV that once the Cairn India-Vedanta deal goes through, the Vedanta Group will become more balanced and diversified conglomerate.

6) Rakesh Arora of Macquarie told NDTV that single-commodity stocks are fraught with risks, so diversification will be the biggest benefit for Cairn India shareholders. "Overall, it's a good deal and should lead to a re-rating for Vedanta," he added.

7) Vedanta Resources' ratings have been under pressure due to a sharp fall in crude oil prices that affected Cairn India's earnings, its largest contributor. This led to Moody's negative rating outlook on Vedanta Resources in January this year. Moody's said it would change the outlook on Vedanta Resources to stable from negative if there was substantial debt reduction and improved operating performance. (Read)

8) Analysts say the timing of the Cairn buyout is likely to have been triggered by a sharp drop in Cairn India's stock as oil prices fell, making for a favourable merger ratio for Vedanta. Cairn India shares have dropped over 50 per cent over the past year.

9) The deal, expected to close in the first quarter of 2016, is the first major structural change under Vedanta Ltd Chief Executive Tom Albanese, the former Rio Tinto boss appointed last year. He said the deal moved Vedanta closer to its goal of being a major diversified player.

10) Vedanta owns about 65 per cent in Hindustan Zinc, whose minorities are likely to be the next target of the Group's clean-up effort, and aluminium producer BALCO, in which it has a 51 per cent stake, analysts said. The government is a minority shareholder in both companies.

Cairn India shares closed 3.85 per cent higher at Rs 187.70, while Vedanta ended 1.3 per cent lower at Rs 181.35 in a Mumbai market that ended 0.6 per cent higher on Monday.