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Strategic Financial
Management
Assignment III Vedanta-Cairn Deal
Case Study
Submitted by:
Atul Rao,
Roll No.-0921919,
3rd Semester Finance,
MBA x, 2009-11.
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Q.1. Will Vedanta Resources succeed in getting open offer of 20%?
Ans. Vedanta will make an open offer of 20% at not less than Rs355 per share
to other shareholders of Cairn India is the 2nd stage of the deal once it is
approved by the Indian Government. The final stake bought from Crain Energy
would depend on the response to a public offer which opens on 11th October,
2010 announced by Vedanta Resources Plc.
The attraction of open offer of 20% in Crain India Ltd.:-
1) Crain India Ltd has70 % stake holding in an oil block in Rajasthan that
has potential to pump 2,40,000 barrels per day which is around 1/4th of
India’s total output.
2) Have a successful exploration business scaled up with very little debt and
positive Cash flows,
3) Vedanta’s offer values Crain Energy at around 17 times one-year forward
earning per share too much higher bid which attract investor easily but
make the deal costly for Vedanta.
4) Recent discovery of oil field named Krishna Godavari basin.
5) The hidden strength of Vedanta is ability to operate in sectors where
politics and policy impacts business.
6) Strong investment plan and indeed cash-rich.
7) A member of the FTSE index of Britain’s largest firms.
The disappointed points for new investors:-
Ist SesaGoa is offering to buy minimum 20% from public. Then based on
the response, Vedanta will buy 40-51% from Cairns. That means Vedanta
wants to hold only 60% in Cairn.
Already ONGC is against Vedanta into oil filed. ONGC is not interested
for Vedanta as they don’t have experience in oil field.
Doesn’t have experienced in Oil and Gas exploration business.
LIC which holds a 2.6% stake in Crain India may not tender its share
unless it gets what the U.K. parent is offered.
So, According to me with the help of the above attraction & disappointments
Vedanta will definitely get success in getting open offer of 20 %.
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Q.2. By replicating the strategy used in other acquisition deals will
Vedanta be able to achieve its goal particularly when the deal is
largely backed by debt?
Ans. Anil Agarwal is reputed to have an ability to see value in seemingly bad
assets. In 2004, he paid Rs.550 crore for BALCO when there were few takers.
Later, he picked up Hindustan zinc Ltd for Rs.600 crore paying Rs.40.50 a
share when the metal price were at rock bottom. Zinc production at HZL which
was formerly a public sector enterprise was raised 500% after acquisition.
Hindustan Zinc’s production has risen from 150000 tonnes to 1 million tonnes.
Today the company is the largest zinc maker.
Also in case of SesaGoa when they acquired it was a 10 million tonnes iron ore
company. This got increased to 25 million tonnes. So, Vedanta’s appetite for
acquisition is no secret. Its strategy as mentioned in the above case creates a
world class metals & mining company.
Vedanta is not breaking new ground. Mining major BHP Billion Ltd’s
petroleum exploration business contributed 17% of its ½ year ended December
2009 revenue & 27 % of its segment profit. Brazil’s Vale SA is seeking to
diversify its energy supplies by acquiring stakes in oil & gas exploration assets.
It owns stakes in around 20 exploration blocks.
Vedanta is able to achieve its goal by using following four approaches:-
1) Assets Optimization
2) Cost Reduction
3) Capacity Expansion
4) Consolidating its holding & seeking acquisitions.
Vedanta will seek opportunities where it can leverage its transactional, project
execution and operational skills & experience. Utilizing captive energy
resources can give a cost advantage. Even if operational or regulatory obstacles
prevent captive usage, it would act as a hedge. When the mining division’s
profit decline due to higher energy prices, the exploration division’s profits will
go up.
Vedanta has spent nearly half its $17 Billion capital investment plan as of fiscal
2010.It plans to spend nearly $ 14 Billion by fiscal 2013 including the pending
capital expenditure, minority buyouts and debt repayment.
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Cash on hand is $ 7.2 billion, fresh debt will provide $4.9 billion & the rest will
come from ongoing cash flows. So this Capex will able Vedanta to achieve its
goal particularly when the deal is largely backed by debt.
Q.3. ‘The timing of the offer helped save Vedanta to the tune
of $9 billion’. Explain the strategy used by Vedanta
Resources.
Ans: As per proposed takeover norms Vedanta is saving $9 billion
Vedanta's offer to pay Rs 50 per share premium as non compete fee to
Cairn India Ltd. to shareholder will not be permitted under the new
takeover norms.
Uniform pricing on shares not applicable at the moment.
As per SEBI proposed norm which provide each shareholder an
opportunity to exit their investment on terms that are not inferior
compared to `substantial shareholders.
SEBI has proposed a takeover code that would trigger need to extend
open offer for 100% of the shares unlike current need for 20% of a
company when threshold shareholding levels are reached (proposed 25%
from the current 15%). This would substantially raise the cost of
acquisitions. Therefore when the above proposals get implemented and if
the deal will not closed then Vedanta will lose the timing offer of $9
billion.
Strategy used by Vedanta resources:-
Vedanta uses its stated strength of assets optimization and cost reduction
to perhaps extract more profits creates cash flows. First SesaGoa is
offering to buy minimum 20% from public. Then based on the response,
Vedanta will buy 40-51% from Cairn India Ltd. Then in this case
Vedanta holds only 60% shares in Cairn India. If we suppose that they
buy 51% from cairn and then float minimum 20% public buy tender, and
they get more than 20%, they will end up holding more than 70% which
is may be out of reach of Vedanta Resources.
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Q.4.What impact the deal has on Vedanta Resource share
price?
Ans : The impact of the deal on Vedanta resources share price fell down and
Cairn India gained. The major concern for this is diversifying from mining &
metals into oil & gas and funding the proposed transaction. Cairn India’s market
cap is approx Rs.67,000 crore and a 26-51% stake will cost it around Rs 17,000-
34,000 crore.
Vedanta Resources Plc share price felled down by 5.5 % to 20.61 pounds in
London Stock Exchange. Sterlite Industries a Vedanta Group firm also fell
down by over 4 % to close at Rs 160.70 in
.At the end of the trade on 20th August Sterlite was the biggest loser.
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