UBS: Sell Cairn India

Cairn India Limited
The deal with the deal
􀂄 Event-based trade, not an investment
Vedanta Resources (Vedanta) plans to acquire 51-60% of Cairn India. Vedanta will
acquire 31-40% directly from Cairn Energy (CNE.L) for Rs355/share and another
Rs50/share of non-compete fees. Sesa Goa will acquire a 20% stake through an
open offer at Rs355/share. Subject to government approvals, the deal is expected to
close by year-end.
􀂄 Scenarios for minority shareholders
1) The deal goes through at Rs405/share at par with Cairn Energy (best case); 2)
The deal goes through at an open offer of Rs355/share; and 3) The deal does not go
through. Scenarios 2) and 3) mean an effective value of Rs310-340/share for the
minority shareholder, depending on the offer subscription and whether Petronas
participates.
􀂄 Risk factors: management attrition and cess
Cairn Energy has assembled top management talent at Cairn India for which
investors are ready to pay a premium. The company will need to retain this talent
post the transaction to be able to maintain the premium. An additional negative if
the deal goes through would be that the cess, which is under arbitration, may be set
at US$7.56/bbl (the company is currently paying this under protest) versus our
assumption and Cairn’s position of US$2.75/bbl. This will depress reported
earnings by 9.1% in FY12 and FY13 and decrease our valuation by 8.5%.
􀂄 Valuation: sum-of-the-parts-based price target of Rs355
At an EV/boe of US$31.11/share, we have a Sell rating on the stock. The stock has
seen some swings lately based on additional comfort and lower risk.