Vedanta nears $8-8.5 bln Cairn India deal - source

LONDON/MUMBAI Fri Aug 13, 2010 6:56pm IST

Cairn India employees work at a storage facility for crude oil at Mangala oil field at Barmer in the desert Indian state of Rajasthan August 29, 2009. REUTERS/Parth Sanyal

Cairn India employees work at a storage facility for crude oil at Mangala oil field at Barmer in the desert Indian state of Rajasthan August 29, 2009.

Credit: Reuters/Parth Sanyal

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LONDON/MUMBAI (Reuters) - India-focused miner Vedanta Resources is close to a deal to buy a 51 percent stake in Cairn India for $8 billion to $8.5 billion, a source familiar with the matter told Reuters on Friday.

The deal would represent Vedanta's first foray into oil and gas, and help Edinburgh-based Cairn Energy fund an expensive drilling programme in Greenland.

The two companies said on Thursday they were in talks about Vedanta, controlled by chairman Anil Agarwal, buying a stake in Cairn India, which is 62.4 percent-owned by the British firm.

Two sources said a deal to give Vedanta control of Cairn India was at an advanced stage, and one said a deal would likely be announced on Monday.

Cairn Energy and Vedanta declined to comment about the talks.

The proposed sale price suggests an around 25 percent premium to the valuation of Cairn India before news of the planned acquisition was first reported.

The bid raised concerns that Vedanta may become overstretched, given its current debt position, investment commitments and recent agreement to buy Anglo American Plc's zinc assets for $1.34 billion, analysts at Credit Suisse said on Friday.

A huge oil find in Rajasthan helped propel Cairn Energy from a small company to a member of the FTSE 100 Index of Britain's largest companies.

It spun off the Indian operations in January 2007 and now its exploration efforts are focussed on Greenland, where it is drilling the first well in over a decade.

"(A) Cairn India share sale would make sense for funding Greenland," analysts at Collins Stewart said in a research note.

Shares in Cairn India, the country's fourth-largest oil and gas company, closed up 4.4 percent, valuing the company at around $14 billion.

Vedanta shares added to Thursday's losses, trading down 5.3 percent on the London Stock Exchange at 1204 GMT, while Cairn Energy traded up 1.6 percent.

CAIRN TO RETAIN A STAKE

Cairn Energy may sell a stake in Cairn India, but would not exit the business, the head of the the company's local unit said on Friday.

"I don't think they are exiting the business. They are just selling stake," Rahul Dhir, chief executive of Cairn India told reporters after meeting Indian Petroleum Secretary S. Sundareshan.

Sundareshan said a company that has signed a production sharing contract (PSC) with the government of India for an oil exploration block would need the government's approval if a stake in the field or the company were sold.

"All PSCs have provisions for appropriate government approvals before such changes in the ownership are made," said Sundareshan, the top official in the oil ministry. Dhir did not provide further details.

"What I do know is that they (Cairn Energy) remain a very strong supporter of our business. If a new strategic shareholder is coming, it only underscores the belief that they have in our business," Dhir said.

Cairn India's Rajasthan field should soon begin to throw off large quantities of cash, which could help fund Cairn Energy's ongoing drilling commitments - thus allowing it to return cash to shareholders via a special dividend, a tactic explorers often employ after exiting a big find.

A strong stream of dividends from Cairn India would also allow Vedanta to pay interest on any debts taken on to finance its acquisition of shares.

(Additional reporting by Pratish Narayanan in MUMBAI; Writing by Himangshu Watts; Editing by Anshuman Daga and Simon Jessop)

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