Bloomberg News

Vedanta’s Purchase of Cairn India Approved With Conditions

July 01, 2011

(Updates with share price in seventh paragraph.)

July 1 (Bloomberg) -- Vedanta Resources Plc won approval from the Indian Cabinet to take control of Cairn Energy Plc’s local unit on condition it bears part of the royalty payments now covered by state-run Oil & Natural Gas Corp.

Vedanta and Cairn Energy need to agree that a portion of the payments by ONGC, which owns 30 percent in a joint venture development of the Rajasthan field with Cairn India Ltd., will be taken from the project’s oil revenue, Oil Minister S. Jaipal Reddy said in New Delhi after a Cabinet meeting yesterday.

“Our contention was royalty is cost-recoverable, their contention was it’s not,” Reddy said. “We stuck to our contention.” Cairn India must also withdraw arbitration against the government over tax on crude oil sales, he said.

Vedanta, a London-based metals producer without experience in producing oil or natural gas, has waited more than 10 months for access to India’s biggest onshore oil deposit in the north of the country as the government studied ONGC’s demand to change royalty terms. The state company is liable for payment of all of the royalty on production from the oil deposit.

“I expect the deal to go ahead,” Richard Rose, an analyst at Oriel Securities Ltd. in London, said by phone. “These conditions will be negative for the valuation of Cairn India. Cairn and Vedanta have already adjusted the purchase price on expectation that the deal would be approved with conditions.”

ONGC Royalties

ONGC said in January that under the current terms it would pay about 140 billion rupees ($3.1 billion) of royalties on Cairn India’s behalf over the life of the Rajasthan field.

Cairn India declined 1.3 percent to 307.70 rupees at 9:29 a.m. in Mumbai trading. The stock has declined 7.5 percent this year. ONGC gained 2.8 percent to 281.80 rupees after climbing as much as 6.1 percent.

Vedanta rose 62 pence, or 3.1 percent, to 2,094 pence, the highest closing level since June 2, in London yesterday, valuing the company at 5.56 billion pounds ($8.9 billion). Cairn Energy advanced 8.5 pence, or 2.1 percent, to 414.8 pence.

Vedanta will wait for official confirmation of the approval and details of conditions before taking action, the company said in a statement after the minister’s comments. Cairn Energy said separately it would work with Vedanta to close the deal.

The two companies this week amended their transaction, with Vedanta saying it would buy 10 percent of the unit from Cairn Energy by July 11 and 30 percent after government approval. They also dropped a no-compete fee, cutting the value of Cairn Energy shares offered to Vedanta to $6.02 billion from $6.65 billion. If the two accept the government conditions, Vedanta will raise its stake in Cairn India to 58.5 percent from 28.5 percent.

Debt Sale

Vedanta, which sold $1.65 billion of debt on May 27 to help fund the purchase, had offered Cairn Energy, which owns 62.1 percent of Cairn India, 405 rupees a share including the 50 rupee non-compete fee. Cairn Energy plans to use the proceeds to give cash to stockholders and explore in Greenland.

Crude oil in New York is up 25 percent since the Vedanta- Cairn deal was announced on Aug. 16.

Vedanta plans to raise a total of $6 billion to fund the acquisition, drawing $3.5 billion from bank loans, about $1.5 billion from bonds and $1 billion selling shares, Chief Financial Officer Din Dayal Jalan said on May 5.

--With assistance from Pratik Parija and Abhijit Roy Chowdhury in New Delhi. Editors: Tony Barrett, John Viljoen

To contact the reporter on this story: Rakteem Katakey in New Delhi at rkatakey@bloomberg.net Firat Kayakiran in London at fkayakiran@bloomberg.net

To contact the editor responsible for this story: Amit Prakash at aprakash1@bloomberg.net John Viljoen at jviljoen@bloomberg.net


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