London-listed mining group Vedanta Resources has completed the first tranche of its purchase of Cairn Energy’s Indian subsidiary after acquiring a 10 per cent stake for $1.5 billion.
Vedanta acquired 191.92 million equity shares of Cairn India at Rs. 355 per share. The total cash payout worked out to Rs. 6,813.16 crore.
While Vedanta’s statement put the acquisition price at $1.505 billion, Cairn Energy in a separate statement put it at $1.36 billion. The difference may be due to the different exchange rates the two companies may have taken.
Following the purchase of 191,920,207 shares on Monday, Vedanta upped its stake in Cairn India to 28.5 per cent.
Cairn Energy will sell another 30 per cent of its interest in Cairn India “subject to the necessary consents and approvals from the government of India,” the U.K.-based firm said.
“Vedanta continues to work with Cairn Energy to secure the necessary consents to complete the purchase of a further 30 per cent of the fully diluted share capital of Cairn India and a further announcement will be made in due course,” a Vedanta statement said.
After this sale, Cairn Energy remains the majority shareholder of Cairn India with a 52.2 per cent shareholding.
Vedanta had in August last year agreed to buy a 40 to 51 per cent stake in Cairn India, but later lowered the shares it intended to buy to just 40 per cent.
It was to pay Cairn Energy Rs. 405 per share, including a Rs. 50 per share non-compete fee.
But government held back its approval as it wanted Cairn to settle long-pending issues of royalty payment with state-run explorer Oil and Natural Gas Corporation and a tax arbitration case against the government.
Sensing the mood, Cairn Energy late last month decided to forego Rs. 50 per share apparently to make up for the loss of revenue Cairn India may face if the government conditions on royalty and cess payments are accepted.
Cairn India’s profit take from its prize Rajasthan oil fields will fall by $1.68 billion in case the riders imposed by the government for approving its parent Cairn Energy’s stake sale to Vedanta Resources are accepted.
The Cabinet had on June 30 approved the deal subject to Cairn Energy or its successor agreeing to cost recovery of royalty in the Rajasthan fields. Also, Cairn has to agree to pay cess on its 70 per cent share of production from the fields.
Sources said while Cairn India will not have to pay any royalty and state-owned ONGC will continue to pay royalty on its behalf to the State government, the levy will be added to the project costs, which are first deducted from oil sale revenues before profits are split between the partners and the government.
Acceptance of this condition by Edinburgh-based Cairn Energy or its successor, Vedanta, will lower Cairn India’s profit over the approved life of the Rajasthan oilfield, lasting till 2020, from $7.43 billion to $5.75 billion.
Sources said the lower profits have been calculated at the approved peak output of 175,000 barrels a day and considering a crude oil price of $70 per barrel.
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The net present value of Cairn India’s loss of profitability is $1.39 billion, a little more than the $800 million concession in the purchase price that Vedanta has already got from Cairn Energy.
Cairn also has to agree to ending arbitration proceedings against the government disputing its liability to pay cess, or tax, on its 70 per cent share of oil from the Rajasthan fields. Cairn India currently pays a Rs. 2,626.50 per tonne cess under protest, but unlike royalty, treats it as a cost recoverable item.
ONGC pays royalty on its 30 per cent share of oil from the Rajasthan fields as well as on operator Cairn India’s 70 per cent take. It will contractually continue to pay royalty on all the oil produced from Rajasthan, but this will be added to the project cost, which is first deducted from revenues earned from the sale of oil before profits are split between partners and the government.
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