Petronas looks set to walk away with a handsome profit from its 14.9% equity interest in Cairn India Ltd (CIL) if a general takeover offer goes through.
CIL operates India’s largest onshore oilfield in Mangala in the desert state of Rajashtan in Northwest India. The company holds 10 production-sharing contracts with the Indian government and other exploration companies. It also owns oil blocks in Sri Lanka.
In August, UK-listed Vedanta Resources Ltd, controlled by billionaire Anil Agarwal, made a general offer of Rs355 (RM24.29) per share for all Cairn India shares subsequently to its proposed purchase of between 40% and 51% equity stake in the oil driller from Cairn Energy plc.
Vedanta is offering Rs405 per share to buy the block from Cairn Energy compared with Rs355 for the general offer (GO). The lower offer is because of a non-compete fee of Rs 50 per unit to be paid to Cairn Energy’s block of shares.
Acquirers pay non-compete fees to the target company’s promoters in lieu of a commitment for not entering the same business in the near future.
Nevertheless at Rs355 or Rs405 or in between, it will still be a lucrative deal for the national oil company.
The divestment is believed to be part of Petronas’ new strategy to divest assets that are in markets that the national oil firm considers not strategic. It is learned that Petronas is also looking at hiving off assets in Pakistan . Petronas ventured into CIL in September 2006, a few months before the latter was listed in January 2007. Petronas had paid about US$700 million (RM2.17 billion) for a 10% stake, in a pre-listing placement or at Rs176.5 a share.
Petronas' new strategy is to divest assets in non-strategic markets. Photo by Reuters
According to news reports in March 2008, Petronas in another private placement acquired an additional 2.7% or 63.3 million shares at US$5.55 (Rs 224.30) per share or about US$350 million in total. Then in October 2009, Petronas bought an additional 2.3% for US$240 million (Rs260 per share), taking its stake to 14.9%.
In total, Petronas investments in CIL amount to almost US$1.3 billion. At Vedanta’s offer of Rs355 per share, Petronas’ 283.4 million shares or 14.9% are valued at US$2.2 billion, which marks a gain of about US$900 million.
However, the chunk could worth more. Vedanta and Agarwal have come under pressure to raise its price for its GO for CIL shares. A panel of the CIL’s independent directors assessing the GO stated that the decision to pay a higher price to Cairn Energy plc is not the “best corporate governance”practice. At an AGM on Sept 15, Cairn India appointed two independent directors to a two-member panel to assess the GO.
“The panel believes that Vedanta’s proposal to offer higher price to Cairn Energy plc, promoter of CIL, than other shareholders of CIL are in line with SEBI rules, but it’s not in line with the best corporate governance,” Omkar Goswami, an independent director on the board of Cairn India who is on the panel, was quoted by the media as saying.
If the GO is upped to Rs405, Petronas stands to make US$2.5 billion, an extra of US$300 million compared with the offer of Rs355 apiece.
Nonetheless, Oil and Natural Gas Corp of India, a state-controlled entity, which has the first right of refusal on CIL’s shares, is not seeking to counter bid. This has somewhat eased the pressure on Vedanta to raise its offer to appease the minorities.
There are also issues with the Indian government vetting Vedanta’s oil and gas prowess, which could scuttle the entire takeover. Oil Secretary (Oil Ministry’s top bureaucrat), S Sudareshan, said at the press conference in Mumbai recently that the issues of the technical capability of the parent company are guaranteed in the production-sharing contracts, so the parent company status would have to be examined.
In contrast to Vedanta, which is involved in mining, the current parent of CIL is Edinburgh-based Cairn Energy plc, a renowned independent oil and gas player, listed on the London Stock Exchange.
Sudareshan is understood to have conveyed his sentiments that his ministry can review production-sharing contracts to the Securities & Exchange Board of India (SEBI) as well.
SEBI has yet to give the green light for Vedanta to buy the block from Cairn Energy.
