Channel: Companies

Tuesday, May 24 2011
Nod for deal? Cairn Energy extends the deadline for Vedanta

Cairn Energy announced its decision to extend the deadline for closing the Cairn-Vedanta deal to sell a majority stake in Cairn India to Vedanta resources. The deal which is said to be the biggest merger and acquisition deal in the oil sector has witnessed a lot of clamor and clutter and does not seem to have a smooth way out even in future.


The deal extension is said to have taken to provide the government more time for its consent. A ministerial panel is likely to meet on May 27 to consider Cairn Energy Plc's sale of a majority stake in its Indian unit to Vedanta Resources, a full seven days after the current deadline for closing the deal expires. Cairn and Vedanta had earlier set May 20 as the deadline for closing the $9.6 bn transaction. Following the long and vexed approval issues, Vedanta has already tightened its grip over Cairn India after acquiring an 18.5% stake in it, including 10.4% stake from Malaysia’s Petronas for $1.5 bn and 8.1% stake through an open offer by subsidiary, Sesa Goa.


Cairn, which had previously set April 15 as the deadline for concluding the sale, had raised a hue and cry over the government's procrastinated approach to vetting the deal, saying the timelines were sacrosanct and could not be extended. But a day after the CCEA (cabinet committee on economic affairs) on April 6 referred the deal for vetting to the GoM, the deadline was extended to May 20.


What looks certain is that deal will go through the hammer but there is a long list of concerns associated with it. Even if Indian government goes for a go-ahead for this deal, ONGC the partner of cairn India will have the final say. The deal can finally become a reality only when Cairn India’s partners in all its Indian blocks, including the government-owned Oil and Natural Gas Corporation (ONGC), give a no-objection certificate (NOC).


As the original licensee, ONGC pays royalty on the entire production from the Barmer block, though it has only 30 per cent interest in it. In the event of cost recovery of royalty, ONGC’s burden will be partially shared by Cairn and the government as the portion of petroleum after deduction of costs, called profit petroleum, will come down. So the issue of cost recoverability of royalty and payment of cess is definitely going to have an impact over valuation. Making the royalty cost recoverable will have to be cleared by the management committee of the block, though Cairn has all along maintained that the production sharing contract should have precedence over the decisions of the committee.


The good thing for Cairn and Vedanta is that the royalty and cess conditions would be limited to the Barmer block. These would not apply to the seven blocks given under the new exploration and licensing policy (Nelp) and the two pre-Nelp blocks in Cambay and Ravva. The approval for these blocks would require NOCs from the partners.


Meanwhile, Vedanta seems confident about sailing through the deal. It has already announced its plan to issue $ 1.5 bn bonds to help it finance the $ 9.6 bn deal. The plan is to raise $3.5 bn from bank loans, $1 bn from equities and this bond issue. Though Company has said that if the deal fails to get the government nod, it will use the proceeds to fund capital expenditure, repay debt and for other general corporate purposes, it is seen as further closeness to the deal.


While the deal has many critics and there is no smooth sailing expected, the government is equally in catch 22 situation. The dipping FDI and declining trust in the government has hit the India’s growth story. To further complicate the problem legal entangles and tax issues have also surfaced. So government will need to trade very cautiously to keep things intact.


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