Tax case and low oil prices make swap ratio adverse
In the corporate world, achieving economies of scale is why bigger is often considered better. It is logical to merge similar businesses—the Aditya Birla Group, for instance, tried to house its cement units under one roof to become a more efficient player. In the process, as managements like to put it, companies are able to extract synergies. The Anil Agarwal-owned Vedanta Group, comprising a clutch of companies across the metals and energy sectors, has mulled corporate restructuring exercises every now and then. One such exercise was opposed by small shareholders because it appeared to be unfair and the management called it off. But the merger of Sesa Goa and Sterlite, announced in early 2012, went through and, for about a year now, Agarwal has been talking about making the structure even simpler with a merger of Cairn India and Vedanta Limited. Given that Indian businessmen prefer complex web-like structures, a clean and transparent corporate entity is to be welcomed.
Having said that, the timing of the Cairn-Vedanta merger and the swap ratio has left some analysts disappointed; they argue it is unfair to Cairn’s minority shareholders who will be given one share of Vedanta Limited for every share they hold in Cairn. As has been pointed out, a year ago, Cairn was valued at more than twice its present value of R33,000 crore, and while the oil producer is weighed down by an admittedly weak $3.3 billion tax litigation, it is also sitting on close to $3 billion of cash. In contrast, Vedanta is burdened by a gross debt of $12 billion while its parent, Vedanta Resources, is indebted to the tune of $16.7 billion; in fact, Cairn had loaned Vedanta $1.25 billion in July 2014 at a rather generous rate of just 300 basis points over Libor. Which is why it would appear the merger has been prompted by the urgent need to pare Vedanta’s debt. In January this year, Moody’s had revised the rating outlook for Vedanta Resources to negative and in its comments in May, the agency noted the company would have to strengthen its balance sheet in FY16 to avoid further pressure on its ratings—in a poor commodity cycle, that is the last thing the company would want. The good news is that Cairn’s minority shareholders have a say and must exercise their rights.