Wednesday, September 30, 2015

Can Cairn India and Vedanta Merger happen?

Cairn India and Vedanta MergerGiven the current scenario in which metals and mining companies globally are facing brutal sell-off it seems highly unlikely for the Cairn and Vedanta merger to go through. Mining giant Glencore collapsed 30% in a single day on 28th Sep 2015. Vale, another Brazil based iron ore giant, is down more than 80% from it’s 2011 high. Back home we have Hindalco and Vedanta Ltd and both has corrected 65% and 75% respectively from their 2014 high. Cairn India is also a commodity company but the dynamics of crude oil is very different from metals which are recyclable. Beside that China consume 40-50% of most of the global metals produces while crude oil demand is fairly distributed.

From the day the merger was announced by the managements of both the companies, I have opposed the merger for being unfavorable to Cairn India’s minority shareholders and explained the reasons in following posts:

As on 30th Sep 2015, there appears to a writing on the wall that the merger is history. Vedanta ltd shares are trading at around 85 level while Cairn India is trading at 150 levels, a premium of more than 75%. Based on average prices as well no minority shareholders including LIC & Cairn Energy PLC would agree to sell their share at Rs. 10 premium as proposed in the merger .

Once the overhang of merger is over by 3rd qtr of this calendar year, the stock could see some re-rating as it has cash and cash equivalent of around 25000 crores while at Rs.150 it has a market value of just 28000 crores. Excluding cash entire company is available at just 3000 crores.

Vedanta Ltd on the other hand might get further de-rated once the merger is denied by the Cairn India shareholders as the company has huge debt on it’s book and will have to payback the entire $1.2 billion loan in 2016 which it took from Cairn India without shareholders’ approval (in 2014) after which Cairn India shares got sever beating on the perceived corporate governance issues.

On Macro level Crude oil seems to be bottoming out as U.S production is falling at higher than anticipated rate. With both macro & Micro situation improving gradually for the Company, the worst for Cairn India stocks and it’s shareholders seems to be over. 

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