Investors squeezed in Vedanta's Cairn India deal

-- The author is a Reuters Breakingviews columnist. The opinions expressed are her own --

By Una Galani

LONDON (Reuters Breakingviews) - Investors are being squeezed in Vedanta's deal to buy a controlling stake in Cairn India. The miner controlled by ambitious Indian billionaire Anil Agarwal will spend as much as $9.6 billion -- more than Vedanta's own market capitalisation -- to purchase up to 60 percent of the Indian oil producer. Yet the London-listed miner's complicated leap into the oil industry serves mainly as a reminder of the risks faced by minority investors in public companies.

To avoid diluting its controlling family's 61 percent shareholding, Vedanta is conducting part of the acquisition through its Indian-listed iron ore subsidiary Sesa Goa. The unit, 57 percent owned by Vedanta, will make a public tender offer for 20 percent of Cairn India shares at 355 rupees per share and fund the $2.9 billion cost from its existing cash reserves.

Vedanta will then make up the difference by buying between 40 and 51 percent of Cairn India from Cairn Energy at 405 rupees per share. This part of the acquisition, which will cost between $6.6 and $8.4 billion, will be funded with bank facilities provided by a consortium of lenders led by Standard Chartered.

It's a punchy acquisition, lacking any apparent financial synergies, for a firm that has no experience in the oil industry. True, the debt looks manageable: Vedanta's consolidated group net debt will be less than two times EBITDA by March 2011, according to bankers. And the company still plans to invest $10 billion in its operations over the next three years.

But that doesn't make the deal any easier to swallow for minority shareholders wary of Vedanta's Indian empire building. Investors in Sesa Goa will be particularly bemused to see all of the iron ore firm's cash suddenly invested into oil. Even so, the family's shareholding is sufficiently large to make approval at both the subsidiary and parent company levels a foregone conclusion.

Minority shareholders in Cairn India are not faring any better. They are being offered a measly 12 percent premium to the undisturbed share price, while majority shareholder Cairn Energy is receiving a 22 percent premium, dressed up as a non-compete agreement.

Indeed, it is difficult to see what the deal brings to Vedanta that shareholders could not have achieved themselves buying shares in the open market. Until Vedanta can demonstrate this clearly, the only real winner is Cairn Energy.

CONTEXT NEWS

-- London-listed miner Vedanta Resources said on Aug. 16 it would spend between $8.5 billion and $9.6 billion to acquire between 51 percent and 60 percent of oil producer Cairn India.

-- The group controlled by Indian billionaire Anil Agarwal will buy between 40 and 51 percent from Cairn Energy, which owns 62.4 percent of the Indian listed group, for 405 rupees per share or a 22 percent premium to the undisturbed share price on Aug. 11.

-- Vedanta will also launch a public tender offer for 20 percent of Cairn India through its iron ore subsidiary, Sesa Goa, at a price of 355 rupees per share. The subsidiary will fund its part of the acquisition using existing cash.

-- Cairn Energy will retain a stake of between 10.6 and 21.6 percent in Cairn India, depending on the uptake of the public tender offer. Cairn India will remain listed on the Bombay Stock Exchange.

-- A group of banks led by Standard Chartered have agreed to provide Vedanta with new debt facilities worth $6.5 billion with a minimum maturity of two years, according to people familiar with the situation.

-- Vedanta were up 116 pence at 2178 pence at 1000 GMT on Aug. 16. Cairn India shares were down 5.5 percent at 335 rupees. Sesa Goa shares were down over 8 percent at 325 rupees.

-- Vedanta press release: link.reuters.com/suf35n

-- Reuters story: Vedanta to buy stake in Cairn India for $8.5-9.6 bln

(Editing by Peter Thal Larsen and David Evans)

(For more business news on Reuters India click in.reuters.com)