July 23, 2016

​​ Share price fall in Vedanta drives revision in Cairn-Vedanta merger terms?

July 22-23, 2016

Share price fall in Vedanta drives revision in Cairn-Vedanta merger terms?

The revision in the terms for the merger of Cairn India with Vedanta,
announced by the two companies on Friday, will have a marginal effect
on the shareholders of Cairn India.

On Friday, the boards of the two companies and their UK-based parent
Vedanta Plc approved the new terms under which a Cairn India public
shareholder will get one equity share of Vedanta for each equity share
held, and received four redeemable preference shares in Vedanta.

The change from June last year, when the merger deal was announced, is
only in the preference shares number. Last year's term had the Cairn
shareholder receiving just one preference share in Vedanta for every
share held. Now, a shareholder will get four preference shares.
Additionally, the preference shares will get redeemed after 18 months
and carry a dividend rate of 7.5 per cent per annum till then.

The merger, which as per the June 2015 announcement was  expected to
be completed by March this year, got delayed, and as per Friday's
announcement it is now estimated to be completed by March next year.

What emerged from a conference call the Vedanta and Cairn India
management had with analysts on Friday evening was that the companies
had over the last one year engaged with their respective minority
shareholders. Reports had suggested that the terms of the deal were
found to be un-attractive by some minority shareholders.

The oil price recovery in recent months was also a consideration
behind the revision, the two companies said in the conference call.

The companies have yet to get minority shareholder approvals and as
per the merger terms, they have to get a majority vote from the
minority shareholders of all the three companies which are parties to
the deal. In Friday's announcement the companies announced the
shareholder meeting dates to be September 8 for Vedanta and September
12 for Cairn India. Post shareholder approvals, the merger deal will
require approvals of high court, foreign investment board and the
petroleum ministry in the government.

Vedanta said that the new terms implied a premium of 20 per cent to
one month average price of Cairn India. At end of June last year,
Cairn India shares traded at Rs 182 while Vedanta traded at Rs 174.
The share price fell in both the companies and at the end of February
this year, Cairn was quoting at Rs 118 while Vedanta was quoting at Rs
71. By end of last month, the two stocks  had recovered to levels of
Rs 141 and Rs 132 respectively. On Friday, Cairn closed at Rs 191.90
while Vedanta closed at Rs 169.30.

The share price trajectory seemed to indicate that the drastic fall in
Vedanta's share price in the one year period from average of Rs 185 in
May-June of last year to an average of Rs 120 in May-June this year,
was a consideration in increasing the number of preference shares from
one to four. In value terms, it adds Rs 30 per share to a Cairn
shareholder as the preference shares will have a face value of Rs 10.

The companies did not expect the ongoing tax-related arbitration cases
pertaining to Cairn India to affect the Cairn-Vedanta merger.

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