‘Vedanta-Cairn deal would accelerate competition in energy sector’

Updated: Aug 27, 2010, 20:50 PM IST

Reema Sharma

Global mining giant Vedanta Resources’ move to acquire 51-60 percent stake in Cairn India for USD 9.6 billion, if goes through, will mark the Anil Agarwal-led group’s entry into the petroleum sector.

Vedanta group operates in areas like copper, aluminium, zinc, lead, silver and iron ore through various subsidiaries across the globe. With the Cairn acquisition, Vedanta will become the second diversified miner, after BHP Billiton, to have oil and gas assets. However, the deal is likely to face hurdles as the government has already raised certain regulatory issues.

Cairn India, which owns 70 percent stake in a Rajasthan oil block, has production-sharing contracts with the government for oil and gas exploration blocks, according to which any ownership change will need federal approval. Some experts also say the government should not give the go-ahead to the deal as Vedanta does not have any prior experience in petroleum production.

However, Narendra Taneja, an expert on the oil, gas and energy sector and South Asia Bureau Chief for the world`s largest oil and gas newspaper, Upstream, holds a different view. “Basically, the implication would be that the deal would pave way for more private sector and international companies to join the foray,” he told Zeebiz.com in an interview.

“A London Stock Exchange-listed company is entering India. Cairn Energy is also a London-listed company. In terms of transfers, we can say that it would be more of a corporate transfer. Everything remains same,” he added.

What would be the upshot? Taneja believes that the Vedanta-Cairn deal would “give rise to competition” in the energy market. “There would now be more competition among the oil companies.”

There are two types of competitions – competition among private companies and competition between private and public companies. “This will be further streamlined if the deal takes place,” Taneja said.

Cairn India, the country`s fourth-largest oil and gas Company, currently produces about 125,000 barrels of oil per day (bpd). Vedanta believes that it has the potential to up production to more than 240,000 bpd, around 25 percent of India`s total output.

“This is the first major acquisition in India’s oil sector. Definitely this deal has garnered a lot of foreign attention. Many foreign companies are aware of it. So we can expect a lot more of foreign investment coming along in the future,” a confident Taneja said.

Asked about reports that India’s state-run companies might pose a counter bid to Vedanta, he said: “There was a time when ONGC (Oil and Natural Gas Corporation, the country’s largest oil producer) used to own the Barmer field (in Rajasthan) completely. But it abandoned the block declaring that there was no oil in the filed. The government sold the field to Shell (Dutch energy major) which later sold it to Cairn. It is also true that the exploration technology in those days was not that advanced. Now, with the advent of better technology things have become much easier. And ultimately everything boils down to money. Now the question is that should ONGC use the money for acquisition or it should use it for some project overseas.”

Taneja, however, added that the energy business would a totally different area for Vedanta.

“Oil segment is a very complicated affair you see. Vedanta has no experience in the oil sector. So I would have been happier if a company with better understanding of oil business entered the oil segment.”

“Cairn has the biggest new oil find in the country. Vedanta is making its first baby step in the oil industry by acquiring these fields. Things otherwise would have been better if a company with wider experience could handle the acquisition,” he said.

According to Taneja, it is a “good deal” for Cairn shareholders. The share price Vedanta offered - Rs 405 per share - is a 32 percent premium to Cairn India`s average closing price over 90 days. This includes a Rs 50 per share non-compete premium for Cairn Energy not entering into oil and gas business in India, Pakistan, Bhutan and Sri Lanka.

Vedanta will buy 40 to 51 percent of Cairn India from its parent company. The final number of shares sold by Cairn Energy will depend on the results of the open offer, which could take Vedanta’s stake to 60 percent. Vedanta Resources will directly acquire 31 to 40 percent interest in Cairn India while the remaining 20 percent would be taken by group firm Sesa Goa.

“From the shareholders point of view, it is absolutely a good deal. Good amount of money would be seen flowing. But I would rather say that right now the deal has a combined connotation. There is a mix of emotion and economics. But at the end of the day, it is all about right numbers and right economics.”


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