August 15, 2010 7:44 pm

Vedanta finalises plans over Cairn India

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Vedanta Resources, India’s largest mining company, was on Sunday night putting the finishing touches to a plan to take a 51 per cent stake in Cairn India, a subsidiary of British oil explorer Cairn Energy.

An announcement is expected to be made this morning. If agreed, the deal will spark a multibillion pound windfall for investors in Cairn Energy, which holds a 62.4 per cent stake in its Indian unit.

Cairn India is listed in Mumbai with a stock market value of around £9bn ($14bn). Under the proposed deal, London-listed Vedanta will make an open offer for 20 per cent of shares in Cairn India. Cairn Energy will then make up the difference to 51 per cent by selling a portion of its stake in the subsidiary. The only other big shareholder is Malaysia’s Petronas, which holds just under 15 per cent.

Cairn India is expected to retain its current management if a deal is struck.

If Cairn sold its entire stake it would raise about £6bn but the company is expected to remain a significant shareholder.

Most of the cash is expected to be returned to shareholders but Cairn also plans to use some to fund a new drilling programme off Greenland.

Cairn India’s fields in Rajasthan produce the equivalent of about 90,000 barrels of oil a day, with plans to increase that to more than 125,000 barrels.

The deal will be Vedanta’s first significant diversification from mining into oil and gas. Controlled by billionaire Anil Agarwal, it is keen to tap into rising demand for energy in India.

If it goes ahead, Vedanta would become only the second diversified mining company in the world after BHP Billiton to move into oil production.

If the two parties reach an agreement, the sale would have to be approved by Indian authorities. India needs imports to meet about 70 per cent of its energy needs, so it could have serious doubts about turning over these assets to a group with no experience of operating oilfields.

State-owned Oil and Natural Gas Company – which holds a 30 per cent interest in the Rajasthan fields – is also said to have the right of first refusal in case of any share sale by Cairn of the Rajasthan fields.

Shares in the FTSE100-listed miner fell at the end of last week amid investor concerns about the deal. They dropped 5.87 per cent, or 128p, to £20.53 on Friday after falling more than 7 per cent on Thursday, making it the worst performer in the FTSE 100 last week.

Shares in Cairn Energy, which is also in the FTSE 100, ended on Friday up 3.42 per cent or 15.50p to 468.30p a share.

JPMorgan Cazenove is advising Vedanta, while Cairn Energy is being advised by NM Rothschild.

Both companies declined to comment on Sunday night.

“It is a matter of concern that a non-energy firm is to take over operatorship of these complex fields,” The Economic Times quoted a senior Indian official as saying over the weekend.

“World over, governments insist on prior experience before companies are allowed even to explore. And here is a firm which has never even seen an oilfield.”

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