A sweetheart deal?

The London-based billionaire Anil Agarwal’s decision to merge the cash-rich onshore oil-exploration subsidiary Cairn India with his Vedanta Group has been received with mixed reactions by some analysts, and even by a section of Cairn shareholders. Whilst Cairn’s CEO was upbeat, saying the deal would benefit both companies, Cairn’s minority shareholders, namely Cairn Plc, the original owners of Cairn India, and LIC are reportedly not so elated.

From the day the proposal was announced there was a suspicion among a section of shareholders and many analysts that Mr Agarwal was eyeing the huge cash pile of Rs 17,040 crore that Cairn is sitting on to pay off its huge debts, amounting to Rs 36,796 crore. Vedanta had earlier borrowed Rs 7,900 crore from Cairn India to pare the debts of one of its companies. However Vedanta has been at pains to deny this and one would have to take the Cairn CEO’s word that the merger would benefit Cairn, make it diversified and, therefore, less prone to the risk that a single product company is open to.

Those wary of the deal seem to have a point when they say the deal is more for the convenience of the Vedanta Group than that of Cairn’s shareholders, and that the latter could use its cash to purchase global assets going cheap. The Vedanta Group has cash-rich assets, particularly in the mining sector.

One would have to see how the minority shareholders, who have got a sweet deal and whose shareholding will go up after the merger, will vote when merger formalities are completed by the end of this financial year.