Mining giant Vedanta enters oil biz with $9.6 bn Cairn deal

Vedanta Resources and its group firm Sesa Goa will acquire 40 per cent stake from Edinburgh-based Cairn Energy Plc for USD 6.65 billion and make an open for to acquire another 20 per cent from Cairn India's other stockholders, Vedanta Resources Chairman Anil Agarwal told PTI over phone.

Cairn Energy, the parent firm of Cairn India, will make up for any shortfall in the open offer, he said. "This deal will give us the world-class Rajasthan oilfields."

Vedanta will pay Cairn Energy Rs 405 per share, a 32 per cent premium to Cairn India's average closing price, over 90 days. This includes a Rs 50 per share non-compete premium to Cairn Energy Plc for not entering into oil and gas business in India, Pakistan, Bhutan and Sri Lanka.

The open offer will, however, be made at Rs 355 (offer price minus the non-compete fee).

The process will take about three months to complete, Cairn Energy Finance Director Jann Brown said.
The acquisition will give Vedanta access to the Mangala oilfield, which is currently producing 125,000 barrels per day but has potential to go up to 150,000 bpd (7.5 million tons a year).

The Rajasthan block, where Cairn India has 70 per cent interest, has the potential to go up to 240,000 bpd or equivalent to the 12 million tons per annum output from ONGC's prime Mumbai High fields.

Vedanta's deal will be contingent on government approval, as Cairn's three producing oil and gas assets, including the Rajasthan fields and seven exploration blocks, either have explicit provisions for seeking prior approval before transfer of interest or gives pre-emption, or the right of first refusal (ROFR), to partners like ONGC.

"Whatever approvals are required, we will take it. We are a law abiding company and will do what is required in the law," Agarwal said.

Cairn Energy Chief Executive Bill Gammell said his firm expects government and regulatory approvals as only ownership of Cairn India was changing while it would be business as usual for the India listed firm.

Gammell is visiting New Delhi this week to meet Oil Minister Murli Deora, besides other senior officials.
Oil Secretary S Sundareshan said today the contract for the blocks Cairn India has provision for transfer of part or whole ownership but neither Cairn Energy nor Vedanta has approached it so far.

Cairn India, 62.37 per cent held by Cairn Energy Plc, is valued at about USD 14.4 billion and the Scottish explorer is expected to continue to hold a residual interest of between 10.6 per cent and 21.6 per cent.

Vedanta will buy at least 40 per cent and up to 51 per cent of Cairn India from London-listed Cairn Energy. 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 per cent.

Vedanta will pay USD 8.48 billion at the maximum 51 per cent that Cairn Energy Plc is willing to sell in Cairn India.

"We were a small base metal producer, with ambitions of becoming an international player in all the natural resources. The acquisition can also position Vedanta as an Indian oil major," Agarwal said, adding that the deal would not impact the company's growth plans in its core-business.

The acquisition "significantly enhances Vedanta's position as a natural-resources champion in India," he said.

In May this year, Vedanta announced a deal to acquire the zinc assets of global mining firm Anglo-American in Ireland and Africa for USD 1.34 billion.
Gammell said the company will return most of the cash raised to shareholders and invest the rest in exploration.

"It's the right time to realise some of the value we have created," he said. "This isn't an exit from India for Cairn Energy Plc."

London-listed Vedanta Resources will acquire 31 to 40 per cent interest in Cairn India while the remaining 20 per cent would be taken by group firm Sesa Goa.

Agarwal said his mining company will raise USD 6.5 billion in debt to fund the acquisition while Sesa Goa, India's biggest iron ore exporter, will fund the deal mainly with its cash resources.

Standard Chartered Plc, Credit Suisse Group AG and Goldman Sachs Group Inc are arranging the financing.

"The transaction will also ensure we have the financial flexibility to focus on an active multi year exploration and drilling programme in Greenland (Cairn Energy's the only other asset part from those held by Cairn India) and also consider further material growth opportunities," Gammell said.

Vedanta will be the second largest firm after BHP Billiton to diversify from mining into oil and gas. The zinc, copper and iron ore mining firm will not only get hold of Cairn India's prolific Rajasthan block but also the Ravva oil and gas field in KG basin.

BHP had moved into oil and gas with its 2001 acquisition of Billiton Plc for USD 11.6 billion.
The Production Sharing Contract for the Rajasthan field is silent on government approval for transfer of ownership, but the Joint Operating Agreement between Cairn India and ONGC gives the partners ROFR in case of stake sale.

The same is the case with gas discovery block CB-OS-2 and the eastern offshore Ravva oil and gas fields. But its seven exploration blocks, including the KG-DWN-98/2 block with ONGC, have explicit provisions for government approval in case of a change in control.