Vedanta Resources, the London-listed mining company, will buy up to 60 per cent in Cairn India, the listed subsidiary of Cairn Energy of the UK, at Rs 405 per share, valuing the deal between $8.5 billion and $9.6 billion, depending on the open offer that must be made.

Cairn Energy, the British parent, which holds 62 per cent in Cairn India, will sell 40 per cent to Vedanta, while the remaining 20 per cent will be bought through an open offer. Cairn Energy will give the bulk of the money so raised to its shareholders and invest the rest in exploration.

Vedanta said if Sesa Goa was unable to purchase the remaining 20 per cent in the open offer, it would buy 11 per cent from Cairn India, taking its stake to 51 per cent.

Sesa Goa expects to have Rs 12,000 crore ($2.6 billion) in cash by the end of March next year, helping to fund the $3 billion purchase, managing director Prasun Kumar Mukherjee told Bloomberg on Monday. Sesa Goa had a cash surplus of Rs 8,054 crore as of June 30, according to its quarterly results.

The open offer to the minority shareholders of Cairn India will be made at Rs 355 per share, but the stake from Cairn India will be bought at Rs 405 per share, including a non-compete fee of Rs 50 per share.

The price is a 32 per cent premium to Cairn India’s average closing price over the past 90 days.

According to the non-compete agreement, Cairn India will have to agree not to indulge in competing activities in and around India for the next three years.

After the deal is concluded, Cairn Energy will have a residual interest in Cairn India of 10.6 per cent to 21.6 per cent, depending on the number of Cairn India shares tendered in the open offer, Vedanta said in a statement.

Vedanta will hold 31 to 40 per cent of Cairn India directly, and Sesa Goa will hold 20 per cent, if the open offer is successful.

The final number of shares to be sold by Cairn Energy will depend on the results of the open offer, which could take Vedanta’s stake as high as 60 per cent. The process will take about three months to complete, Cairn’s finance director Jann Brown said on a call to Bloomberg.

“It’s the right time to realise some of the value we’ve created,” Cairn chief executive officer Bill Gammell told Bloomberg. “This isn’t an exit from India for Cairn Energy.”

Vedanta will borrow as much as $6.5 billion to fund the acquisition, deputy chairman Navin Agarwal told Bloomberg on a conference call.

JP Morgan Cazenove and Morgan Stanley are acting as joint lead financial advisers along with Standard Chartered, which is also arranging the financing together with the Credit Suisse group and the Goldman Sachs group.

Credit-default swaps linked to Vedanta debt rose 116 basis points to 649, the highest since May, according to data provider CMA. Swaps are used to speculate on a company’s ability to repay debt and gain when perceptions of credit quality deteriorate.

Anil Agarwal, chairman of Vedanta, said in a statement that the proposed acquisition would significantly enhance his company’s position as a natural resources champion in India. “Cairn India’s Rajasthan asset is world class in terms of scale and cost, delivering strong and growing cash flow. “

“Cairn India has a proven management team and a very significant further resource potential and it will benefit from Vedanta’s track record of acquiring and growing world class companies, especially in India,” he said.

The statement said that on completion of the transaction it would be classified as a reverse takeover of Vedanta under the rules of the UK listing authority. “Applications would need to be made in due course to the listing authority and the London Stock Exchange for the ordinary shares of the enlarged Vedanta to be admitted to the official list and to trading on the exchange, respectively.”

According to market experts, the timing of the deal may have something to do with the recent announcement of changes proposed in the takeover guidelines. If these changed guidelines were in force now, they would have forced Vedanta to pay double the amount it is paying.

“If the recent recommendations in the takeover code to increase the open offer size to 100 per cent were enforced now, then

Vedanta would have been forced to pay about $16-18 billion,” Jagannadham Thunuguntla, head of research at SMC Capitals, said.

VVLN Sastry of Firstcall India said the deal might prove to be an expensive proposition for Vedanta, since it may have to shell out further to consolidate the step-down subsidiaries of Cairn India, which are the real revenue generators. “They will be forced to buy stake from other stakeholders to get real value from all the projects that are partially controlled by other stakeholders,” Sastry said.

The deal is a big gamble for Vedanta and Anil Agarwal considering the sheer size of the transaction, according to market experts. The total market capitalisation of Vedanta is about $9 billion where the deal size with Cairn Energy is about $8.6 billion to $9.5 billion.

“In other words, Vedanta is trying to put its entire company at stake for this deal,” Thunuguntla said.

However, Deven Choksey, managing director of KR Choksey, believes that it is a positive development for Vedanta. “This is because they are not buying the complete stake and also since the enterprise value to Ebitda is around 5.40, which is lower than even Reliance Industries’. Hence in my opinion, it’s not an expensive deal.”

Agrees Puneel Goel, associate director of KPMG. He said that “Vedanta going into petroleum is a natural corollary of its overall business of natural resources. Petroleum is as much of a natural resource as copper or aluminium.”

Asked if the company was stretching itself financially and whether the deal made economic sense, Goel said it depended on the state of the economy. “If the economy is on a good wicket, so will be Vedanta. It will depend upon how issues are resolved and handled.”

Cairn India’s stock took a plunge of 6.36 per cent to Rs 332.85 on the Bombay Stock Exchange on Monday in view of the non-compete fee of Rs 50 per share that would not benefit them. “Long-term investors, however, took the opportunity to book profits,” Sastry said.

Sesa Goa’s also stock fell 8.9 per cent to Rs 322.55 on concerns over the $3.3 billion that the company would have to shell out from its kitty in the open offer.

Cairn India’s current management will continue running the company after the acquisition, Agarwal said in an interview with a TV news channel on Monday. Vedanta would provide guidance to the management, he said.

Agarwal, with an estimated fortune of 4.1 billion pounds ($6.4 billion), built his wealth on aluminum, zinc, copper and iron ore after buying Shamsher Sterling in 1979. Vedanta was the first Indian company to list its shares on the London Stock Exchange in 2003, according to its website, employs 30,000 people and has operations in India, Australia and Zambia. The company said in 2008 it would spend $20 billion in India over four years on mines and power plants.

The group’s Rs 37,596 crore earnings in 2009-10 has largely been dependent on India and China. According to Bloomberg data, India accounts for 49 per cent of its revenues, China 23 per cent and Europe 11 per cent. West Asia gives it 8 per cent, the UK 5 per cent, Asia 2 per cent and South East Asia and Africa 1 per cent.

In 2002 Vedanta acquired fully integrated zinc operations, including three lead zinc mines and three smelters in Rajasthan and Andhra Pradesh.

In addition, the company has wide ranging global mining and trade businesses. It owns the Mt Lyell copper mine in Tasmania, Australia. It also owns copper mines in Zambia in Africa.

Copper yields 48 per cent of its revenues, zinc 21 per cent and iron ore 15 per cent. Energy and gold give 4 per cent of its total earnings.

PTI reports that this is the second time Cairn Energy shareholders will make money, thanks to Cairn India. About $1.3 billion to $1.4 billion of the $2 billion raised through the Cairn India IPO were paid to the UK-listed firm’s shareholders.

Cairn India is the only cash profit generating subsidiary in the portfolio of Cairn Energy, which also has exploration assets in Greenland.

vikassrivastav@mydigitalfc.com

(With inputs from Ranjit Bhushan, New Delhi)