As per the latest press release from Cairn India, the Board of Vedanta Limited (VEDL IN, `157.1, Buy) and Cairn India Limited have approved revised and final terms for the proposed merger between the two companies. As per the modified terms, each Cairn India minority shareholder will receive for each equity share held, 1 equity share in Vedanta Limited along with 4 redeemable preference shares with a face value of `10, with a coupon of 7.5% and tenure of 18 months from the date of issuance (note that as per the previous terms, Cairn India minority shareholders were to receive for each equity share held, 1 equity share in Vedanta Limited along with 1 redeemable preference share with face value of `10). As per the press release, the jurisdictional High Courts have convened the shareholder meetings for Vedanta Limited and Cairn India on September 8, 2016 and September 12, 2016, respectively. Note that as per latest closing price of both stocks, the offer is in the money for the minority shareholders of Cairn India.
We continue to value Cairn using the average of two methods , reserve-based DCF valuation using a WACC of 9.5%; and discounted dividends over the contract life of the Rajasthan block, plus net cash. Our TP implies downside of 13.5% and we rate the stock Hold as we use conservative estimates for production volumes.