Anil Agrawal of Vedanta, Sterlite fame becomes aggresive.......

Going For Black Gold

In May, a few bankers walked into the headquarters of Anil Agarwal-owned Vedanta Resources in London with a blind suggestion to take over Cairn India, the 62 per cent subsidiary of London-headquartered Cairn Energy. Agarwal gave them the go-ahead to begin talks. But who would approach Bill Gammell, the overpowering CEO of Cairn Energy? After all, they were going to ask him to sell his most lucrative asset — Cairn India. Agarwal decided to bell the cat himself and, in his own words, “it clicked”.

In his meeting with Gammell, Agarwal found that Cairn was more keen to focus on its core competency — exploration. In fact, before Cairn India went public in 2007, Cairn Energy had approached partner ONGC to sell the Rajasthan field where oil had just been discovered. However, ONGC wasn’t keen on buying at that point. Agarwal says he had been thinking of entering oil and gas for two years. “I had many discussions with bankers. The name of Cairn came up about three months ago.”
Cairn India made sense for several reasons. Vedanta has cash reserves of $8 billion; the acquisition would enable debutant Vedanta to participate in the next round of bidding under the New Exploration Licensing Policy (Nelp); and, finally, Cairn is the second-largest private oil company in India with one of the largest onshore oil bodies in the world.
Analysts, however, are apprehensive about the mineral and metals group’s capabilities in the oil business. Prasad Baji, senior vice-president at Edelweiss Securities, says, “Vedanta is following the BHP Billiton model to become a diversified resource management company. It is not an easy task. They will have to deal with a different product and market.” Agarwal, however, allays this concern saying Cairn India has a strong management and he intends to retain it.
Says Anindya Mohinta, an analyst at Citi, “The bigger question for Vedanta shareholders is the post-deal balance sheet ($10 billion debt) and leverage (2.4 times forecast 2011 Ebitda), which make it the most leveraged large-cap mining stock in our UK coverage.”


Deal Matrix
If completed, the Vedanta-Cairn deal would be the third largest by an Indian company, behind Tata Steel’s $12-billion buyout of Corus and Bharti Airtel’s $10-billion takeover of Zain’s African telecom assets. While some analysts call it “gambling”, Agarwal calls it “opportunity”.
Vedanta will spend $8.5-9.6 billion for 51-60 per cent stake in Cairn India. While parent Vedanta Resources will raise a debt of $6.5 billion, group firm Sesa Goa will front $3 billion ($1.8 billion cash reserves, $1 billion internal accruals and $200 million from loans, say banking sources) to make an open offer for 20 per cent (wholly owned subsidiary THL Aluminium will first buy 31-40 per cent from Cairn Energy). London-based Standard Chartered Bank, Vedanta’s main lender, is arranging a syndicated loan of $5 billion. The mandatory open offer worth Rs 13,631 crore will begin on 11 October.


Check Points
Agarwal is no stranger to acquisitions. Starting off as a scrap dealer in Mumbai in 1976, the 56-year-old has built his empire buying sick assets cheap and turning them around. In creating the $8-billion mining and metals giant, he has acquired 11 companies (including Balco, Hindustan Zinc, Sesa Goa and Dempo’s iron ore mines).
But the Cairn deal is a challenge. First, Cairn India’s minority shareholders are up in arms over the lower open offer price of Rs 355 a share. Cairn Energy will get Rs 405 per share (Rs 50 as non-compete fee). LIC of India (2.5 per cent stake in Cairn) may stay away from the open offer due to the price difference. Petronas, the largest institutional shareholder (14.94 per cent), has not indicated its preference yet.

Another bone of contention is ONGC’s 30 per cent stake in Cairn’s prolific blocks in Rajasthan, including the oil-rich Mangala field. ONGC gives royalty to the state government and pays cess on the profit. Sources in ONGC say the firm could lose $2-3 billion in revenues from the blocks because of these payments.
ONGC is studying its right of first refusal (RoFR). But Harshad Katkar, research analyst at Deutsche Bank, says, “We believe ONGC has a limited role to play.”
There are other hurdles as well. CPI-M leader Tapan Kumar Sen on Thursday said the government should not allow the transfer of the Mangala oilfield to Vedanta. Petroleum secretary S. Sundareshan also reportedly said that the “production-sharing contract provides for concurrence of the government when any assignment of interest in a block takes place”.
Vedanta needs to address the ministry’s concerns because acquiring Cairn’s assets in India will get it access to the blocks awarded under Nelp. The tax department, too, is waiting: a similar deal between Vodafone and Hutchison for Indian telecom assets of Hutchison Essar is still mired in dispute with the taxmen asking for Rs 12,000 crore for ‘sale and purchase of an Indian asset on foreign shores’.
Besides, the deal requires mandatory approvals from the Reserve Bank of India (RBI) and the Securities and Exchange Board of India (Sebi). Analysts at HSBC Global Research say, while Vedanta will be able to secure such approvals, there will be a lead time of 2-3 months.



What Next?
At present, Vedanta is consolidating its businesses under five verticals — copper, zinc, aluminium, iron ore and power. Oil and gas will be the sixth vertical for it. Vedanta Resources will continue as a holding company.
Financially the acquisition will add $2.5-3 billion Ebitda (earnings before interest, taxes, depreciation and amortisation), says Tarun Jain, director (finance), and an Agarwal confidant. With this acquisition and other greenfield projects under construction, in two years, Vedanta aims to be a $13 billion-Ebitda company. This will give Vedanta the heft to compete with larger rivals such as Reliance Industries (in oil and gas), Hindalco Industries (in non-ferrous metal) and Anil Ambani group firm Reliance Power and Tata Power (in power generation).
The company posted $2 billion Ebitda in FY 2010, while its net profit was $1.5 billion. Cairn India, which posted $222 million net profit last fiscal, raised its production in Rajasthan to 0.12 million BPD (barrels per day) from about 17,500 BPD in the March 2010 quarter. With 10 blocks in India, it had $0.55 billion cash and $0.74 billion unutilised loan facility at the end of June 2010. Meanwhile, since Vedanta is pursuing a capex plan of $17-18 billion, it will use a part of its existing cash reserves for it.

Even as he works out the details of acquiring Cairn India, Agarwal may be reminded of investor billionaire Warren Buffett’s words: It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.

Anil Agrawal's Interview:
‘We Need A Large Asset’
Caught unawares by Vedanta Resources’ $9.6-billion offer to buy a majority stake in Cairn India, the Indian government is brandishing its veto clause. Parent Cairn Energy’s CEO Bill Gammell rushed to New Delhi to apprise the government about the deal and to soothe tempers. The only concession the government has apparently been able to extract is for the other shareholders — Vedanta may make an open offer of Rs 405 per share. Its current offer is Rs 355 per share versus Rs 405 it will pay Cairn Energy (Rs 50 being the non-compete fee). Minority shareholders are not happy with the difference. In the midst of the dust kicked up by the agreement, Vedanta Resources chairman Anil Agarwal spoke to BW’s Nevin John from his London headquarters. Excerpts:



Cairn’s acquisition move was rather unexpected. What was the trigger?

I see it as an opportunity. How often do you get opportunities like this? We are lucky — Vedanta is sitting on a cash reserve of about $8 billion, and we need to invest in a large asset to move forward in the growth trajectory. For the Sesa Goa cash reserve, we are getting an interest of just 5 per cent. Apparently, when we invest in Cairn, the return on the same money will be 15 per cent. Also, we own an asset.


Do you think the deal is expensive?

We are paying 20 per cent premium over the market price. Normally, it is around 30-35 per cent. Our offer for Cairn stake is reasonable considering the size and potential of the asset.
Running an oil company will be a new challenge — a different market, a different regulatory environment…
Cairn is run by one of the best manage-ments in the country. There is a CEO, a CFO and the board members, and also 2,000 highly qualified professionals. Only the shareholder is changing. We will not change the structure; not even the name. Vedanta will support Cairn in its expansion plans.
There are reports that ONGC could oppose the deal.
Cairn has a perpetual agreement with the government. ONGC is our 30 per cent partner in the (Rajasthan) block. Whatever approvals are needed, whatever needs to be done for such a deal, we’ll do it.
The minority shareholders are unhappy with the open offer price of Rs 355 a share, compared to Rs 405 for the promoters.
First of all, everybody should understand that we are paying a non-compete fee, which is just a fee as per the Sebi takeover code. The fee can be up to 25 per cent of the deal size; we are paying just 10 per cent. Second, the clause means the Cairn promoters will be missing out on potential markets such as India, Pakistan, Bhutan and Sri Lanka.


How do you plan to raise the $6.5 billion of debt?

It will be syndicated loans from foreign banks, with maturity of 2-5 years. The debt will be on the books of Vedanta Resour-ces, which has a net debt of just $947 million now. With the acquisition, the debt will go up to $9-10 billion, after discounting cash and equivalents of $6 billion. Sesa Goa may not raise any debt for its $3 billion investment.
My View:
I have already given my verdict when I read that Sesa Goa will also bid for 20% stake in Cairns India.It is bound to be positive.Let whatever analyst wants to speak , it is going to be positive on Vedanta as well and for Anil Agrawal as well.
As we have read in the above text, Anil Agrawal has come a long way from a crap, turning around loss making unit and taking over.
This is a man of substance and buying Oil Co makes sense in atleast for next 3-4 decades but not less as the demand will keep rising.
Essential commodities like Coal,Iron Ore, Copper, Manganese, Sugar, all types of grains, Oil and Gas are going to have field day in next 3-4 decades to come....not least to mention Gold, Silver, Platinum an Uramium.Uranium because it can happen that as coal gets dearer and dearer,Atomic plant power can become more viable ....and many countries can try to go for that....
Hence I feel that if the deal goes through , with all leverages burden of Cairns India , I still feel that it will do good for Sesa Goa......
These same analyst will come out and will say that this was a great decision taken by Mr.Anil Agrawal.If we talk of what experiance Anil Agrawal has got , let me write that what Mukesh Ambani was having as experieance when he ventured in Oil and Gas?It all starts from a crap....and to me Anil Agrawal is a seasoned player now as he has established himself as a great busiman who hass got graet business sense.......
I hail the decision of Vedanta and Sesa for bidding for Cairns India.....