Move by Vedanta, Cairn to cut deal value fuels optimism

Written by Reuters | Mumbai | Updated: Jun 29 2011, 07:10am hrs
The move by Vedanta Resources and Cairn Energy to cut the price of their long-pending deal could signal the end-game as the two firms edge closer to agreeing to Indias demands of sharing royalty payments, analysts said on Tuesday.

Cairn Energy agreed last August to sell a majority stake in Cairn India to Vedanta in a deal that was valued at up to $9.6 billion, but the deal, which would be one of the largest in India's energy sector, has been delayed due to a disagreement over royalty payments.

Indias oil ministry has been pushing for Cairn India to share royalty payments with state-run Oil and Natural Gas Corp, which has a 30% holding in the Cairn-operated fields in western India but pays 100% of the royalties.

Vedanta and Cairn on Monday agreed to remove a non-compete fee that would cut the price of a 40% stake in Cairn India by around $630 million in a move that has fueled optimism about the deal.

Although yesterdays changes to the deal weigh on Cairns valuation, the announcement indicates that negotiations are moving forward, Morgan Stanley said in a note to clients.

In particular, we believe they signal that Vedanta is willing to accept new, expected government conditions, which removes an important roadblock that has so far prevented Cairn from realising the value of Cairn India, Morgan Stanley analysts said in the note.

Vedanta and Cairn late Monday said they had agreed to remove a non-compete provision and a related fee of Rs 50 per share, cutting the price tag for the total 40% stake being sold to $6.02 billion from $6.65 billion.

While the price cut is likely aimed at placating the government, Cairn also agreed to sell 10% of its India unit to Vedanta in a deal that would bring Vedantas stake to nearly 30%.

The fact that Vedanta will have nearly a third of Cairn India after buying 10% more by next month, they wont be desperate for the governments approval for the remaining 30% stake to take controlling stake, said Jagannadham Thunuguntla, head of research at SMC Global. Vedanta has already swept up an 18.5% stake in Cairn from an open offer and from Malaysias Petronas.

Shares in Cairn India, which have fallen nearly 13% since the announcement of the deal, fell as much as 2.4% to R301.90 on Tuesday, as investors worried about loss of revenue due to royalty payments.