5 Reasons why LIC could say no to the Cairn Vedanta merger



1. LIC till 31st March had little over 1.5% stake in Vedanta Ltd while over 9% stake in Cairn India. If there is more value in Vedanta Ltd than Cairn India then why LIC stake in Vedanta is just over one and half percent. Also the logic of tax overhang on Cairn India for low valuation is meaningless as if the court ruling is in favor of CBDT, it is Vedanta which will have to shell out the tax and penalty amount which will be huge setback considering it's already stretched balance sheet. 

2. LIC had over 11% stake in Hindalco till 31st March 2015 and has recently increased it's stake in the company by 2% to 13%. As we all know Hindalco and Vedanta are somewhat similar company with majority of revenue coming from Aluminium and copper refining. Its must be observed that LIC is preferring Hindalco vs Vedanta for obvious reason. If the merger go through LIC would eventually have very high exposure to metals sector as it's stake in Vedanta Ltd will be go over 6%.

3. LIC currently receives around 150 crores of dividend out of it's investment in cairn India while post merger it's dividend income from swapped shares will reduce to around 70 crores per annum with relatively increased risk as Vedanta has very high amount of debt and Cairn India is a cash rich company.


4. The current proposed merger will lead to the de-listing of the only private pure play Oil & Gas company and a lost opportunity for LIC to own a large scale India based oil & gas giant with significant stake.

5. The proposed merger is not only pathetic for retail shareholders, its is equally bad for govt of India, as the merger will lead to significant savings on Dividend Distribution tax which govt would have collected from constantly high dividend outflow from Cairn India. Also once Cairn India is merged it will loose focus on Oil & Gas exploration and development which is a serious set back for India's energy security. Regarding ongoing tax dispute govt. of India has the security of cash war chest of roughly 25000 crores lying at Cairn India balance sheet which can easily be used in case of ruling in favor of govt. Hence there might be invisible pressure on LIC from Govt. of India side to disapprove the current merger proposal.



3 comments:

Ravikiran said...

Hmm yeah I agree that the merger is not a good deal at all of Cairn shareholders.
Is there is possibility of the merger falling apart?
What about shareholder voting? Could the retail and institution weigh in their votes to disallow the merger?

Sam Philip said...

Naked Rip Off

Cairn shareholders are being ripped of while corporate India watches on. If you look at the past Vedanta & Anil Agarwal are known for dirty tactics. The Cairn board is nothing but puppet of Vendanta. They are noting but low-life.

The price of crude is low now, and it is not going to stay low for long.

And if you look at the proven reserves on the ground, future exploration prospect as a pure oil company & the price of crude reverses to normal the potential is huge.

Amit if you take the above into consideration then the value is much higher.

Our only consolation is LIC standing in the way of this merger and negotiating for a better deal. And I feel that the government should keep the company independent and say “No” to this merger via LIC, as oil being a stratergic asset for our energy security.

Did you hear any SEBI investigation on shares being accumulated by companies on behalf of Vedanta and their cronies in the last two months. Will insider trading rules be applicable to such transactions?
Hate to see being part of Vedenta Group who take corporate governance as noting but a “Joke”.

Disclosure: Holds shares on Cairn India and Hindustan Zinc.

Amit Agarwal said...

As expected and explained above LIC Monitoring wing has given thumbs down to the cairn vedanta merger which is good news for existing shareholders of Cairn India. Once the entire overhang of this merger is out and crude price improves by October end, the stock should see a decent rally from current levels of 170 bucks.

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