MUMBAI Aug 24 Vedanta Resources' (VED.L) up to
$9.6 billion offer for control of Cairn India (CAIL.BO) looks
set to face hurdles, including a possible counter-bid from a
consortium of Indian state-run energy firms.
The Indian unit of Cairn Energy (CNE.L) has
production-sharing contracts with the government for oil and
gas exploration blocks, and the agreement says any ownership
change will need federal approval.
Cairn India holds a 70 percent stake in an oil block,
called RJ-ON-90/1, in the western Indian state of Rajasthan,
while Oil and Natural Gas Corp (ONGC.BO) holds the balance.
Approval from the state-run partner is required for any change
An oil ministry source told Reuters on Monday all options
were open for Indian state energy firms to make a counter bid
for Cairn India. [ID:nSGE67M0KB]
A banking source familiar with the matter told Reuters that
ONGC, GAIL (GAIL.BO) and Oil India (OILI.BO) -- all
state-controlled -- were considering a joint bid for Cairn
Following are scenarios on what might happen to the deal:
ONGC, OTHER STATE FIRMS MAKE COUNTER-BID
Most analysts do not expect ONGC and other state energy
firms to launch a counter bid.
Vedanta's offer values Cairn Energy at about 17 times
one-year forward earnings per share, according to Thomson
Reuters Starmine estimates, and analysts say a higher bid would
make the deal expensive -- at a time when ONGC and other state
firms are aggressively looking to buy overseas assets.
"It's not that ONGC and other state companies can't raise
$10 billion for a counter-bid, but the main issue is if they
invest this amount on new overseas assets that will create much
more value," said Jagannadham Thunuguntla, equity head at SMC
ONGC and Petrovietnam are expected to submit a joint formal
offer within weeks to buy BP's (BP.L) stake in the Nam Con Son
gas project, Oil Secretary S. Sundareshan had said on July 27.
Government officials have expressed concern about Vedanta's
proposed purchase of Cairn India. The country's trade minister
said on Tuesday ONGC should have a say in the deal.
VEDANTA/CAIRN INDIA AGREE TO PAY ROYALTY
Even though Cairn India is the operator of the Rajasthan
oil block with a majority interest, it is ONGC that is liable
to pay royalties to the government on the entire crude
production from the block.
ONGC has said previously it wants the government to
reimburse it for royalties it would have to pay beyond its 30
percent stake in the block.
Analysts say the government, ONGC, Vedanta and Cairn India
may work out a deal under which Cairn India agrees to pay
royalties for its 70 percent share in the block.
In August 2009, Cairn India began pumping crude from the
Mangala oil field in the Rajasthan block. Cairn Energy made the
discovery in 2004 -- the first major oil discovery in the
energy-hungry nation in two decades.
The find helped propel Cairn Energy from a small company to
a member of the FTSE index .SXEP of Britain's largest firms.
Cairn India, which listed in 2007, is developing three oil
fields -- Mangala, Bhagyam and Aishwariya -- in the desert
state of Rajasthan.
Production at the Mangala field is ramping up to the target
plateau rate of 125,000 barrels of oil per day (bopd). Bhagyam
has the potential to produce 40,000 bopd and Aishwariya another
The company has said the oil field in Rajasthan has the
potential to pump 240,000 barrels per day -- around a quarter
of India's output.
OPEN OFFER PRICE BEING RAISED
Vedanta has offered 405 rupees a share to buy between 40
and 51 percent of Cairn India from Cairn Energy.
The final stake bought from Cairn Energy would depend on
the response to an open offer for a 20 percent stake made to
minority shareholders at 355 rupees a share. The open offer
opens on Oct. 11. [ID:nLDE67F074]
Under terms of the deal, Cairn Energy would be paid the
extra 50 rupees a share for not competing with Vedanta in
Analysts say the open offer price to minority shareholders
is lower than expectations. Vedanta could raise the price and
assuage concerns they are being undercut by the deal.
Life Insurance Corp of India, which holds a 2.6 percent
stake in Cairn India, may not tender its shares unless it gets
what the UK parent is offered, the Mint newspaper reported last
VEDANTA WALKING AWAY FROM THE DEAL
Even though some analysts have questioned the reasoning
behind a miner seeking to foray into oil exploration, Vedanta
Chairman Anil Agarwal is unlikely to walk away from the deal.
Agarwal has experience in working with the government and
has navigated choppy regulatory waters to buy stakes in Bharat
Aluminium Co and Hindustan Zinc (HZNC.BO).
A deal with Cairn would give Vedanta a slice of India's oil
reserves and exposure to surging demand. Vedanta expects Cairn
India to produce around 200,000 bopd by early 2012.
Vedanta acquired the zinc assets of Anglo American (AAL.L)
in May, making it the world's largest integrated zinc and lead
producer. Cairn India's main asset, with an estimated 6.5
billion barrels of oil and gas, in Rajasthan is near Vedanta's
zinc operations. [ID:nLDE6490BL] [ID:nLDE6441O9]
BHP Billiton (BHP.AX) (BLT.L) is the only large mining
company to have a significant interest in oil.
(Editing by Ranjit Gangadharan and Muralikumar Anantharaman)