The Vedanta group announced the much-speculated merger of Cairn India with Vedanta Ltd, subject to approvals. Cairn’s minority shareholders have been offered one equity share of Vedanta Ltd and a 7.5% redeemable preference share of Rs 10, for each share held in Cairn. The transaction implies a value of Rs 55/share for its 70% stake in the Rajasthan block—discount to intrinsic value, in our view. We suspend our rating and target price as we expect Cairn India stock to trade at merger-parity with Vedanta Ltd.
The issuance of preference share will allow Vedanta Plc to retain a majority stake in Vedanta Ltd. The preference share will have a tenure of 18 months; however, an option for cash exit at par will be provided within 30 days of issuance. Vedanta Plc’s ownership in Vedanta Ltd will reduce to 50.1% from the current 62.9% and Cairn’s minority shareholders will get an ownership of 20.2% in Vedanta Ltd. The proposed transaction is expected to be complete by Q1CY16.
Cairn’s minority shareholders who are open to investing in other commodities will obtain exposure to a diversified portfolio of commodities instead of a pure play on oil & gas, if the merger is approved. Conversely, the minority shareholders who invested in the stock taking a view on oil & gas will have to submit to risks on other commodities or exit. The exit option through the proposed transaction, at current market prices, implies a value of R55/share for the Rajasthan block stake, well below our computed fair value of Rs 104/share.
The proposed merger between Cairn and Vedanta will require the approval of (i) a majority (greater than 50%) of minority shareholders (for both the listed entities) voting for or against this transaction, as per Sebi’s circular CIR/CFD/DIL/8/2013; (ii) more than 75% in value terms and a simple majority in number, of all present and voting shareholders, including the promoter group, for statutory clearance by the tribunal; and (iii) MoPNG (ministry of petroleum & natural gas) for transfer of petroleum mining rights.