vedanta cairn deal


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vedanta cairn deal

  2. 2. OVERVIEW OF THE DEAL    Vedanta Resources is in talks with Cairn Energy, which has a 62.4% stake in Cairn India, to buy a stake in the unit Cairn is country’s fourth-largest oil and Gas Company, valued at $13.6 billion, valuing Cairn Energy’s 62.4% stake at $8.5 billion Vedanta wants to buy between 40 and 51% of Cairn India from Cairn Energy and are offering to buy up to 20% from other shareholders for a total stake of 51 to 60%
  3. 3. ABOUT VEDANTA RESOURCES      Largest mining and non-ferrous metal company in India Headquarter is in London, UK Diversified in natural resources basically in Zinc, Lead, Silver, Copper, Iron Ore, Aluminium, and Power Vedanta Operated across India, Sri Lanka, Zambia, Namibia, South Africa, Liberia, Ireland, and Australia In India Vedanta Operated through: • • • • • Copper - Sterlite Industries (India) Ltd. Zinc - Hindustan Zinc Limited. Aluminium - Bharat Aluminium Company Ltd., Vedanta Aluminium Ltd. Iron ore - Sesa Goa Ltd. Oil & Gas - Cairn India Ltd.
  4. 4. CAIRN INDIA LIMITED      Cairn Indian is the largest crude oil producer in India Cairn India is one of the most significant oil and gas exploration and Production Company in South Asia Oil and gas is currently being produced from Rajasthan, Ravva and Cambay In Rajasthan Cairn India is the operator with 70% participating interest Its joint venture (JV) partner, ONGC, has the remaining 30% participating interest
  5. 5. NEED FOR THE DEAL From Vedanta Perspective:  Vedanta’s strategy is to create a world-class metals and mining company, using four approaches: asset optimization and cost reduction, capacity expansion, consolidating its holdings and seeking acquisitions  Want to buy a stake in Cairn India to diversify into Oil & Gas  Believes it can earn a better return on investment than the market rate of return in the long term ( eg. of mining major BHP Billiton Ltd.’s)
  6. 6.   Could act as hedge for Vedanta Resources: When mining division’s profits decline due to higher energy prices, the exploration division’s profits will go up Cairn has successful exploration business that is being scaled up, very little net debt and positive cash flows
  7. 7. From Cairn’s perspective:   Cairn India would be able to utilize Vedanta’s core skills of project management and development of reserves and resources Cairn Energy ltd. needs cash for Greenland exploration
  8. 8. ISSUES PERTAINING TO THE DEAL      Funding for the proposed transaction: Huge acquisition cost of between $8.5 billion and $9.6 billion (Rs40,00045,000 crore) Cash on hand is $7.2 billion Debt will shoot up after the transaction Credit rating agencies have downgraded Vedanta as the firm plans to borrow to finance the acquisition. Fitch Ratings downgraded Vedanta’s rating from ‘BBB-’ to ‘BB+’
  9. 9.  Cairn has signed a production sharing contract (PSC) with the government of India for an oil exploration block would need the government’s approval if some stake in the field or the company were sold  Approval from state-run explorer ONGC, which has a 30% stake in Cairn India’s Rajasthan oil block called RJ-ON-90/1, is also crucial for any change of ownership at British firm’s Indian unit
  10. 10. SWOT FOR VEDANTA STRENGTHS  Largest mining and non-ferrous metals company  Excellent Product Portfolio  Asset optimization and cost reduction skills  Have many Subsidiaries WEAKNESSES  Vedanta shares were down 4.6% as analysts questioned its ability to afford another big acquisition  Funding is the main concern  No prior experience in oil exploration OPPORTUNITIES  First move into oil and gas  It could act as a hedge THREATS  Other companies interest in buying Cairn  Regulatory hurdles from government  Hurdle from ONGC
  11. 11. PROJECT OVERVIEW Project would concentrate on devising Strategies for Vedanta if everything goes against it. The following issues are there which need to resolved.  Diversification into Oil & Gas Sector  Put and Call options  Right of Pre-emption and First Refusal  Managing the Royalty Payment Issues  Managing goals of different stakeholders
  12. 12. DIVERSIFYING INTO OIL & GAS SECTOR      Cairn is a unique exploration and production platform Cairn (India) world-class resource base includes interests in nine blocks in India and one in Sri Lanka. The block in Rajasthan is India’s largest oil discovery in the last 20 years Lack of experience in oil & gas industry Vedanta group can use four components optimization and cost reduction; capacity expansion; consolidating its holdings; and acquisitions
  14. 14.    Question of Value Question of Rarity Question of Imitability
  15. 15. Strategic Position and Action Evaluation (SPACE) Matrix The SPACE matrix evaluates different variables and assigns them a score considering how important they are for the situation of any company Internal Strategic Dimensions S. No. 1 2 3 4 Financial Strength (FS) Return on capital employed of 17.5% Free cash flow up 39.5% at US $ 3.5 Billion Revenue up 7% to US $ 15 billion EBIDTA up 21.4% to 32.6% Total Average Rating 4 6 5 5 20 5 S. No. Competitive Advantage (CA) Rating 1 2 3 4 High quality assets Low cost of production Excellent product portfolio Skill and expertise Total Average -2.0 -1.0 -3.0 -2.0 -8.0 -2.0
  16. 16. External Strategic Dimensions S. No. Environmental Stability (ES) Rating 1 Technological Know How at the Firm Level -1.0 2 Competitive Pressure -2 3 Barriers to entry into market -2.0 4 Intervention of the Government -5 Total -10.0 Average -2.5 S. No. Industry Strength (IS) Rating 1 Profit Potential 5 2 Growth rate 3 Total 8 Average 4
  17. 17. Directional vector coordinates: X-axis: CA rating+ IS rating = (-2) + 4 = 2 Y-axis: FS rating + ES rating = 5 + (-2.5)= 2.5 Financial Stability Aggressive Competitive Advantage Industry Strength Environment Stability
  18. 18. Put and Call Options  Vedanta & Cairn had entered into put and call arrangements in relation to a part of the equity shares of Cairn India that may be retained by the cairn Group.  The put and call obligations related to a number of the shares of Cairn India equal to the shortfall between the number of Sale Shares actually acquired by the Acquirers and 51% of the Voting Capital, subject to a maximum of 10% of Voting Capital of Cairn India.  After July 31, 2012 the first of put and call options was exercisable for duration of 6 months and the other after July 31, 2013 for duration of 6 months. The exercising price is Rs. 405 per share in both the cases.
  19. 19. Right of Pre-Emption and First Refusal  If the cairn group proposed to transfer any of the shares that they would continue to hold after the period of 6 months from closing, the Vedanta could exercise a ‘right of first refusal’ in respect to those shares at INR 405 per share. Managing the Royalty Issue    Cairn has also a pending dispute with ONGC on the payment of royalty. It has declined to share the royalty payments to the government as it was paid by ONGC since beginning as per the contract. Indian Government has agreed to restrict ONGC’s royalty payment in proportion to their holding and not for the entire block. This issue has been continuing since five or six years. In Barmer Block, ONGC paid 100 per cent royalty and tax on the entire crude production.
  20. 20. Managing Goals of Different Stakeholders • Shareholding Pattern of Cairn India Prior to the deal • • • • Cairn Energy 62.7% stake Petronas 14.94 % stake Others 22.7 % stake Shareholding Pattern of Cairn India Prior to the deal • • • • • Vedanta Resources 38.83% stake Cairn Energy 21.84% stake Sesa Goa 18.45 % stake Sesa Resources 1.72 % stake Others 19.16 % stake
  21. 21. STAKEHOLDER ENGAGEMENT FOR VEDANTA  Vedanta Sustainability Framework – Group’s Social Policy and supporting Technical Standards   Stakeholder engagement Technical Standard is aligned with international best practice Committed to effectively responding to stakeholder feedback Ex-,  455 emails have been received between 1st April 2012 and 31st March 2013 28 -information about the company 102 -goal of finding employment.
  22. 22. STAKEHOLDER ENGAGEMENT AND DISCLOSURE PLAN  Identification, analysis and engagement of stakeholders in all stages of the Project lifecycle in a proactive manner  Categorization of identified stakeholders on the basis of their engagement with the company  Identification of representatives of different categories of stakeholders  Identification of stakeholders who are at a risk of being disproportionately-affected by the operations of the business with special emphasis on vulnerable communities  Devising engagement mechanisms for each stakeholder group
  23. 23. STRATEGY FOR THE COMBINED GROUP     Create an Indian natural resources champion with a comprehensive footprint across India’s resources sector To utilise the Group’s skills to accelerate the exploration, development and production of Rajasthan’s oil and gas assets. Engage a large number of different stakeholders through investor relations, human resources, community relations and government relations departments Extending Portfolio into Oil & Gas for vedanta & further enhance its position in Rajasthan for cairn India
  24. 24. Benefits of the Deal • Its position in India: Cairn India has huge experience in exploring, discovering, operating production assets in India for many years with ONGC, Government of India and state governments, regulators and key industry participants. • Development and operational expertise: Cairn India has a proven track record of developing resources with low cost in oil & gas sector. • Solidifies Vedanta’s position: Vedanta group intensifies its position in Rajasthan in private core sector by getting into energy portfolio along with Zinc.
  25. 25. Key Takeaways of the Deal     Cairn Energy is a significant shareholder in Cairn India, with 10.6-21.6% stake. Further, Vedanta would have a pre-emptive right over any subsequent sale by Cairn Energy of its remaining stake in Cairn India, hence such disposal would result in the recipient of the shares holding >20% of the issued share capital of Cairn India. Cairn Energy and Vedanta have also entered into reciprocal put and call arrangements. Put and call options were written to enable Vedanta and Cairn Energy to ensure that minimum of 50% Of Cairn India is acquired from Cairn Energy at Rs405/share. Cairn energy (including cairn India) wants to focus more on its core competency which is exploration apart from keeping more profitable units alive. Cairn Energy’s strategy is to add value through exploration. Most of the sale proceeds are return to shareholders as planned by Cairn energy and remaining part of the cash use for exploration elsewhere and appraisal programs for the ongoing activities. To maintain balance in its portfolio, Cairn Energy doesn’t want to sell the entire stake. This was to protect itself from Greenland exploration portfolio which is a high risk-return game.`
  26. 26.  Though the government approvals are routine, it could be hindrance many a times as government structures & policies keep changing.  Vedanta is only going to provide guidance with the present management of Cairn India continuing in the board. Further, it stated it has no intention to de-list Cairn India.  Depending on the estimated oil and gas in place resources, Vedanta is aiming to produce more than the existing capacity in Rajasthan asset. However, Vedanta doesn’t have any prior oil & gas experience to claim to produce better than the current production.