The proposed merger between petroleum producer Cairn India and its parent Vedanta Plc is “likely to be unlikely”, Edelweiss Securities said.
Raising the question of minority interest, Edelweiss said the deal does not seem to offer any overt benefits to Cairn India.
“From Cairn’s perspective, we fail to understand the benefits of any synergies that could result from the merger, while VEDL (Vendanta) shall lower its debt by accessing Cairn’s INR 160bn cash pile,” said the broker.
Under Indian laws, for the deal to go through, it would have to have the support of more than half of the minority (unrelated party) shareholders of both companies, it noted.
In Cairn India’s case, it noted that two key shareholders could swing the deal either way – the original parent Cairn Plc and and government-owned Life Insurance Corporation of India (LIC).
The UK-based Cairn Plc still holds 9.8% of Cairn India, while LIC holds 9.1%. Together, these two companies own around 47% of the minority shareholding in the company, giving them the power to determine whether or not the deal goes through.
Independent shareholders may not share the enthusiasm of the main shareholder and parent Vedanta about the deal and may not be keen to exchange their Cairn India shares for Vedanta shares, it said. Vedanta has gross debt of around Rs 75,800 crore (758 bln), it noted.
“In fact, an imminent conglomerate discount shall further impact Cairn’s value given the merger. We believe Cairn’s minority shareholders shall weigh these issues very carefully,” it added.
Edelweiss analysts Jal Irani and Yusufi Kapadia also noted that the deal would require approvals from both government of India as well as the High Court.
“The ongoing income tax dispute could be a significant hurdle too,” they said in a note. “The merger will require High Court approval, during which time tax authorities may stake their claim, similar to the earlier Sesa‐Sterlite merger (now VEDL).”