NEW DELHI: The managements of Scottish explorer Cairn Energy Plc and Vedanta Resources of NRI metals tycoon Anil Agarwal, which are negotiating a $9.6-billion deal, on Monday announced major changes in the terms of their transaction that signal an acceptance of the fact that the new owner of Cairn India will have to take on a $2.5-billion royalty burden in the company's crown jewel—the Barmer oilfields in Rajasthan.
The "adjustments", as a Cairn Energy Plc announcement on its website euphemistically described them, reduces the value of the deal. It is to be seen whether the changes pass muster with the Cairn Energy board or its shareholders. These changes may also face challenge from minority shareholders who would see returns on their stocks decline. At home too, the changes would adversely impact shareholders of Cairn India. The Barmer royalty-share issue has been dogging the deal since its announcement in August last year. State-run ONGC, Cairn's 30% partner in Barmer, pays the entire royalty on crude from the field under a historical policy anomaly. ONGC, which has the pre-emption right, set the condition that it would clear the deal only after Cairn—or subsequently Vedanta—accepted to equitably share the Rs 18,000 crore royalty burden, to be borne through the fields' life at $70/barrel crude price, by allowing the outgo to be included in cost of operations before calculating profit. Cairn and Vedanta have so far opposed the condition. Cairn issued a number of deadlines—only to extend them each time—for the government to clear the deal.
It said the contract with the government did not allow such conditions which would suck out $2-2.5 billion out of the deal's valuation. But the oil ministry and a ministerial panel set up to examine the deal stood by ONGC and the Cabinet is expected to take up the deal on Thursday with the same conditions.
Monday's adjustments in the terms of the transaction, thus, come as a clear sign of a reality check on the two managements. These changes entail "removal of the non-compete arrangements and associated fee, which are expected to result in a 5.3% reduction in post-tax proceeds". Cairn and Vedanta have also agreed that "completion of the transaction will take place in two tranches: an initial sale of a 10% stake in Cairn India, and a subsequent sale of a 30% stake which remains subject to receipt of the necessary consents and approvals from the government of India". "The removal of the non-compete fee will result in a reduction in the effective sale price from $8.66 per Cairn India share to $7.85 per Cairn India share. This change in price applies to both the initial sale of 10% and the subsequent sale of a 30% stake in Cairn India. Gross proceeds for the sale of a 40% interest in Cairn India will amount to $6,023 million with net proceeds expected to be approximately $5,408 million in cash."
The sale and purchase of the first tranche of sale shares, being 10% of the fully diluted share capital of Cairn India, will be completed on or before 11 July 2011. The gross proceeds for the sale of the first tranche of sale shares will amount to $1,506 million with net proceeds expected to be approximately $1,365 million. The sale and purchase of the second tranche of sale shares will be 30% of the fully diluted share capital of Cairn India and remains subject to receipt of the necessary consents and approvals from the government of India. The gross proceeds for the sale of the second tranche of sale shares will amount to $4,517 million with net proceeds expected to be approximately $4,043 million.
The non-compete and associated fee had a premium iin the Cairn India stock which would now be bought by Cairn at Rs 255 instead of Rs 405 agreed initially. The impact of royalty share would further erode its value, which some market analysts said, could go down to around Rs 250 per share.
Source- Times Of India
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