UK-based energy explorer Cairn Energy is set to vote against an offer to buy out minority shareholders in its former subsidiary Cairn India by Vedanta Ltd, according to people familiar with the situation.
The move will cast doubt on the overall transaction, which was proposed last month by Mumbai-based resources conglomerate Vedanta Ltd in part to bolster the finances of its heavily-indebted London-listed parent Vedanta Resources.
Cairn Energy is Cairn India’s largest minority shareholder, with a 10 per cent stake. Vedanta Resources controls about 60 per cent, but Indian law requires that a majority of minority shareholders also approve the deal.
This means that the two largest minorities — Cairn Energy and state-backed insurer Life Insurance Company of India (LIC), which holds about 9 per cent — are likely to be able to block the transaction, analysts say.
A vote against the merger would mark the latest twist in the often tumultuous relationship between Vedanta and Cairn, which began when Vedanta’s billionaire founder Anil Agarwal bought out the British group’s majority holding in a long-delayed $9.6bn deal in 2011.
Cairn Energy’s objections rest on “fundamental” disagreements over valuations, alongside a preference for holding an investment in an energy company rather than a distributed resources group, according to one person with direct knowledge of the matter.
Cairn Energy is also understood to have raised further concerns when it met representatives from Cairn India and Vedanta last month, including over the likely use of Cairn India’s Rs178bn ($2.8bn) net cash pile.
“There are big differences on valuation and worries about Vedanta’s debts, so the management are not minded to support it,” the person said, speaking on condition of anonymity. A spokesman for Cairn Energy declined to comment.
Some analysts suggest Vedanta Resources would use Cairn India’s cash pile to pay down a portion of its $8.5bn in net debts, diverting investment away from the Indian explorer’s main oilfields in the Indian state of Rajasthan.
Tom Albanese, Vedanta Resources chief executive, defended the deal, pledging to win over wavering minorities before it was put to a vote in the final quarter of 2015.
“There has been speculation about minority intentions, but there is a long time before we have to vote, and people will come round,” he said. “This transaction is still as compelling as it was a month or so ago.”
Vedanta argues Cairn India’s shareholders will benefit from being part of a diversified resources group with interests including iron ore, zinc and copper offering protection against swings in oil prices.
Falling commodity prices over recent weeks have sent Vedanta Ltd’s shares down 22 per cent during July, hitting the terms of the deal. This involves a share swap between the two companies and implied a 7 per cent premium to Cairn India’s share price on June 12.
LIC declined to comment on its stance, but Shriram Subramanian of Bangalore-based corporate governance research group InGovern said the Indian insurer was also likely to have “reservations” about the deal.
“Of course you expect minorities to ask for more at this stage,” Mr Subramanian said. “But we feel even improved terms aren’t likely to be good enough and in the end they [LIC] should oppose this, and it won’t go through.”