London Stock Exchange-listed Vedanta Resources on Sunday announced the merger of its cash-rich Indian subsidiary Cairn India Ltd with ailing Vedanta Ltd, in an all-stock deal worth $2.3 billion to minority shareholders.
The debt-laden mining and metals company Vedanta Ltd currently owns a little over 60-per cent stake in cash-rich oil and gas explorer Cairn India.
Vedanta offered minority shareholders of Cairn India, including LIC, one equity share in Vedanta for each equity share they hold and one redeemable preference share in Vedanta Ltd with a face value of Rs10 and an assured dividend of 7.5 per cent per annum.
The effective swap ratio, including the preference share, is 1:1.04.
The preference share will have a tenure of 18 months, after which it will be redeemed for cash at face value.
Cairn India's minority shareholders will have a 20.2-per cent stake and Vedanta Ltd's minority shareholders will own 29.7 per cent in the combined entity.
The deal is expected to be completed by March 31, 2016.
After the merger is completed, parent Vedanta Resources Plc's holding in Vedanta Ltd will come down to 50.1 per cent from 62.9 per cent.
Vedanta will be using Cairn's cash reserves to repay debt. Vedanta Ltd currently has debt of Rs37,636 crore while debt-free Cairn India has cash reserves of over Rs16,800 crore.
The merged entity, intended to be the country's largest natural resources company, will have a topline of Rs80,000 crore and an EBITDA of Rs22,226 crore per annum. The net debt on books of the merged entity will amount to Rs31,540 crore because a $1.25 billion loan given by Cairn India to Vedanta Ltd last year will get absorbed in the deal.
But, according to Vedanta, the merged entity will be better equipped to allocate capital to the highest return projects across the portfolio, will have greater financial flexibility to sustain strong dividend distribution and bring greater cost savings and potential re-rating to benefit all shareholders.
''The transaction will contribute to further the streamlining of internal processes and improved productivity, beyond the previously announced $1.3 billion. Stronger balance sheet will allow for the overall cost of capital to be reduced,'' Vedanta and Cairn India stated in a joint press release.
The company also allayed fears of Cairn India stating that the merger will offer long-term sustainable value enhancement for all shareholders.
''Earnings will be de-risked through increased diversification, offering exposure to a larger, more resilient and more diversified commodity mix, stable cash flow supporting investment and dividends through the cycle, driving long term value,'' Cairn said.
The merger offers Cairn India shareholders exposure to Vedanta Limited's Tier-I, structurally low cost, longer-life assets, including the lucrative zinc business, which have significant latent capacity ramping up.
''The driving force behind the merger is simplification of businesses of Vedanta Resources Plc and to achieve economies of scale in the businesses each company operates,'' former Rio Tinto CEO Tom Albanese, now CEO of Vedanta Resources Plc, said at a press conference.
Albanese said the company had already made arrangements to refinance its debt. He said, Vedanta has already refinanced $400 million this year and is in talks to refinance $2 billion payable next year. He added that investors in Cairn India stand to benefit from Vedanta's recent investments in the metals and mining space.
''We will soon be engaging with LIC and Cairn Plc, the largest minority shareholders in Cairn India, who hold about 20 per cent together, to seek their approval,'' Albanese added.
The Income Tax Department's freeze on the 9.2 per cent shareholding of Cairn Plc in Cairn India will be another hurdle to the merger. ''The freeze will still continue but it will be replaced with Vedanta shares,'' said Albanese.
The company feels the merger will not affect the renewal of operating licences at its flagship oil producing field in Barmer, Rajasthan. The licence is up for renewal in 2020. Albanese ruled out the possibility of any retrenchment arising from the merger. There will also be no change in Cairn's top management, he added.