Vedanta Sweetens Terms of Merger with Cairn India

The Vedanta Group today sweetened terms for the merger between Vedanta Ltd. and Cairn India Ltd. in an effort to ensure the deal goes through this time. The Vedanta Group has been facing stiff resistance from minority shareholders, especially Life Insurance Corporation and Cairn Plc., against the proposed transaction, ever since it announced its intention to merge in June 2015.

Vedanta announced the revised and final terms in a regulatory filing on the Bombay Stock Exchange. Each shareholder of Cairn India will receive,

• 1 equity share in Vedanta
  
• 4 redeemable preference shares with a face value of Rs 10 in Vedanta with a coupon of 7.5 percent and tenure of 18 months from issuance.

Rs 2,510.3 Crore Sweetener

The company is now offering four redeemable preference shares (RPS) with face value Rs 10 as opposed to one share that it offered in June 2015. These preference shares will have a coupon rate of 7.5 percent. This means each shareholder will get an additional Rs 44.5 at the end of 18 months. The merged entity, Vedanta, will pay Rs 3,347 crore in cash when the redeemable preference shares come up for redemption at the end of 18 months.

Vedanta earlier offered Rs 836.76 crore in cash upon redemption of RPS to Cairn India shareholders. Cairn India generated additional cash of Rs 3,000 crore since June 30, 2015.

Once the deal is completed, Vedanta Plc. will hold 50.1 percent on a pro-forma basis. Minority shareholders of Vedanta will hold 29.7 percent in the combined entity, while shareholders of Cairn India will hold 20.2 percent.

Access to Cairn India’s Cash

The merger also gives Vedanta access to cash in the books of Cairn India. Cash and cash equivalent in the books of Cairn India stood at Rs 19,500 crore at the end of June 30, 2016, according to an investor presentation on the company’s website. This compares to Rs 16,500 crore that it had at the end of June 30,2015. Vedanta’s increased offer is less than the cash added by Cairn India in the last one year.

The Merged Entity

The merged entity will have a pro-forma earnings before interest, tax, depreciation and amortisation of Rs 15,012 crore and profit after tax of Rs 6,216 crore. The combined entity will have a gross debt of Rs 77,952 crore and cash of Rs 52,666 crore.

The Timeline

The merger would be effected via a scheme of amalgamation and that would require the approval of minority shareholders of Cairn India and Vedanta, apart from other regulatory approvals, including from the high courts. The court convened a shareholders’ meet for Vedanta and Cairn India on September 8, 2016 and September 12, 2016. The company hopes to complete the merger by the first quarter of calendar year 2017.

Management Call Takeaways

• Minority shareholders will be given the option to immediately cash out in 30 days. The RPS will be traded on the exchanges.
  
  
• Tax matter with the Indian government is sub-judice. Vedanta Plc is in arbitration with the government.
  
  
• Cairn Plc.’s stake in Cairn India is frozen currently. The company does not expect to face any issue with respect to the share swap. Vedanta’s chief executive officer said the swapped shares will be an asset for the government, and so, the company doesn’t see any resistance to the merger.
  
  
• No issues with respect to conditions for extension of Cairn India blocks. The company believes the ownership remains that same, and deal is just internal restructuring.
  
  
• Postal ballots and court convened shareholder meetings to be aligned.
  
  
• Current average cost of debt at 7.5 percent for Vedanta Ltd. CEO of Vedanta expects the cost to come down by 1 percent.
  
  
• Majority of the shareholders are on board with respect to revised terms of merger.
  
  
• The liability of Cairn India pass on to the books of Vedanta.