Vedanta-Cairn merger brings little cheer to shareholders

Analysts claim the new entity would be debt-laden and low on cash

The acquisition of Cairn India by Vedanta failed to cheer shareholders of the oil producer. The merger was completed on Tuesday.

Since the acquisition was first announced in August 2010, Cairn India shareholders have lost 7.2 per cent of market value. This is despite the company’s share price doubling in the past one year on the back of stable crude oil prices.

As of Wednesday, the market value of Cairn India was ~58,000 crore.

When Vedanta announced the acquisition in 2010, crude oil prices were about $75 a barrel. Since then, oil prices fell 26 per cent to about $55.62 a barrel on Wednesday. This has hit the Indian company hard.

Shareholders of Cairn India were also unhappy when the company gave a $1.25-billion loan in July 2014 at a low rate to Sesa Sterlite (now Vedanta), instead of distributing the cash among them as special dividend or buyback.

The BSE Oil and Gas Index gained 40 per cent at the same time (see chart).

A Vedanta spokesperson said Cairn India was acquired for about ~300 per share. It was still in the same range. The company also paid out dividend for years. “This was despite oil prices falling by half,” the spokesperson said.

Vedanta and Cairn finally announced the merger on June 2015. The company said it would create a diversified metal- and oil-producing firm.

The merged entity would have access to ~26,000 crore worth of cash and equivalents, which is currently on Cairn India’s books, according to a presentation made by it on February 9. Analysts are of the opinion that synergy of acquisition would take years to fructify.

“Falling oil prices also played an important role in shareholders not getting returns. There is anecdotal evidence that 70 per cent of the M&As (mergers and acquisitions) fail to make money for small shareholders,” said Shriram Subramanian, founder and managing director, InGovern Research Services, a proxy advisory body.

Going forward, it might be even more difficult for Cairn India’s minority shareholders to make money from the combined entity, said analysts.

“Cairn India shareholders are exchanging a high-return, cash-rich and debt-free company for a low-return and debt-laden one,” said an analyst who did not want to named.

Cairn India’s return on net worth (equity) has been 15.9 per cent annually on average in the past five years, much higher to Vedanta’s standalone 9.3 per cent. This includes the figures for erstwhile Sterlite Industries, which merged with Sesa Goa in 2013 to create Vedanta.

At the end of FY16, Vedanta (on a standalone basis) had net debt of ~37,000 crore and debt to equity ratio of around one.