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Cairn India (CAIR)
Energy
A royal(ty) mess. We are surprised by the decision of the Cabinet Committee on
Economic Affairs (CCEA) to refer the CNE-VED deal to a Group of Ministers (GoM). The
CCEA is technically superior to a GoM and the ministries concerned had already studied
the deal and given their inputs. VED has stated that it will proceed with the open offer
as scheduled and Petronas has reportedly stated its intention to sell its 14.9% stake in
the open market. We retain our RS on the stock and do not rule out further delays in
the conclusion of the deal.
CCEA puts the ball in GoM’s court, which will later pass it back to the CCEA
The key outcomes of the CCEA meeting were—(1) the pending issue of government approval has
been referred to a group of ministers to be headed by the finance minister, (2) GoM will decide on
the complex issues of royalty and cess, (3) the cabinet has no differences in opinion on the cost
recoverability of royalty. We are not sure about the stumbling block given the reported unanimity
in views. The oil ministry had laid down two options before the CCEA—(1) conditional approval to
the deal and (2) approval to the deal with option of legal recourse on royalty and cess issues
available to the parties concerned.
What happens to the open offer?
VED has stated the proposed open offer will go ahead as scheduled and would open on April 11,
2011 and lapse on April 30, 2011. We do not see a large subscription to the open offer in light of
(1) current market price being close to the open offer, (2) unfavorable tax implications of tendering
shares in open offer as opposed to selling in the open market and (3) pending government
approval on the Cairn Vedanta deal, which might delay the final transfer.
We highlight that shares tendered in the open offer will be kept in an escrow account and the
transaction will be complete only on the receipt of a government approval. Sesa Goa will have to
pay interest on the consideration for the intervening period. If the government does not approve
the transaction, the shares would be returned to the original shareholder. In the meantime,
Petronas reportedly wants to sell its 14.9% stake in the open market.
Still a long way to go
We do not rule out significant delays in the conclusion of the deal. As per media reports, the
matter will be taken up for discussion by the GoM only after the conclusion of the state elections
in May 2011, which will again refer the matter back to CCEA. We note that VED is unlikely to go
ahead with the deal in its current form if royalty is treated as a cost-recoverable item or CAIR has
to bear royalty proportionate to its production from the key Rajasthan block.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Cairn India (CAIR)
Energy
A royal(ty) mess. We are surprised by the decision of the Cabinet Committee on
Economic Affairs (CCEA) to refer the CNE-VED deal to a Group of Ministers (GoM). The
CCEA is technically superior to a GoM and the ministries concerned had already studied
the deal and given their inputs. VED has stated that it will proceed with the open offer
as scheduled and Petronas has reportedly stated its intention to sell its 14.9% stake in
the open market. We retain our RS on the stock and do not rule out further delays in
the conclusion of the deal.
CCEA puts the ball in GoM’s court, which will later pass it back to the CCEA
The key outcomes of the CCEA meeting were—(1) the pending issue of government approval has
been referred to a group of ministers to be headed by the finance minister, (2) GoM will decide on
the complex issues of royalty and cess, (3) the cabinet has no differences in opinion on the cost
recoverability of royalty. We are not sure about the stumbling block given the reported unanimity
in views. The oil ministry had laid down two options before the CCEA—(1) conditional approval to
the deal and (2) approval to the deal with option of legal recourse on royalty and cess issues
available to the parties concerned.
VED has stated the proposed open offer will go ahead as scheduled and would open on April 11,
2011 and lapse on April 30, 2011. We do not see a large subscription to the open offer in light of
(1) current market price being close to the open offer, (2) unfavorable tax implications of tendering
shares in open offer as opposed to selling in the open market and (3) pending government
approval on the Cairn Vedanta deal, which might delay the final transfer.
We highlight that shares tendered in the open offer will be kept in an escrow account and the
transaction will be complete only on the receipt of a government approval. Sesa Goa will have to
pay interest on the consideration for the intervening period. If the government does not approve
the transaction, the shares would be returned to the original shareholder. In the meantime,
Petronas reportedly wants to sell its 14.9% stake in the open market.
Still a long way to go
We do not rule out significant delays in the conclusion of the deal. As per media reports, the
matter will be taken up for discussion by the GoM only after the conclusion of the state elections
in May 2011, which will again refer the matter back to CCEA. We note that VED is unlikely to go
ahead with the deal in its current form if royalty is treated as a cost-recoverable item or CAIR has
to bear royalty proportionate to its production from the key Rajasthan block.
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