How analyst’s view Vedanta-Cairn deal?
Vedanta Group today said that it will acquire 51% to 60% of Cairn India for an aggregate consideration of approximately USD 8.5-9.6 billion in cash. Shares acquired from Cairn Energy to be acquired at a price of Rs 355 a share and Vedanta will also pay a non-compete fee of Rs 50 a share. The transaction will be funded through debt and cash resources and the deal is immediately EPS accretive.
Promoted by Anil Agarwal Vedanta is the London-listed holding company that owns Sterlite Industries, Hindustan Zinc and Sesa Goa.
In an exclusive interview with Myiris. com, Soumen Ghosh research analyst, SKP Securities and Prashanth Tapse, Sr. research analyst, Mehta Equities shared their respective views about the deal and and also provided their valuable strategies:-
What do you make up from the first instance of the deal?
Soumen Ghosh : The deal would mark a significant transformation for Vedanta, which produces aluminium, copper, zinc, lead, and iron ore, and would make it only the second diversified miner, after BHP Billiton, to have oil and gas assets. The deal is an attempt on Vedanta`s part to smoothen their future operational cash flows, and to enter one of the most profitable and scalable businesses in the world. Vedanta move would put it in charge of one of India`s most significant oil fields, with an estimated capacity, when fully up and running, of up to 240,000 barrels a day. For Cairn Energy, it provides an opportunity for the company to monetise its most significant asset at a premium. Though the deal is valued at a premium to the market price, however, considering the assets, it looks justified.
Prashanth Tapse: It an expensive deal for Vedanta because Cairn India (Q,N,C,F)* is valued around Rs 350 a share wherein the offer price is around Deal valued at Rs 405 a share. One might see some short-term up move in the prices looking at the premium Vedanta is paying but if we see Vedanta`s experience in oil exploration which is zero and oil exploration is absolutely a different business from which Vedanta is in exactly right now, which puts us on cautions node for cairn future prospects. Upon acquisition of majority stake, Vedanta Resources will have to make an open offer for additional 20% stake. But the deal is contingent upon government approval. However, India`s market regulator SEBI has now proposed for revising open offer size to up to 100 %, in which the acquirer would have to offer to acquire the entire company. Further, the deal would go more attractive if there would be any counteroffer from other players who has experience in oil exploration and take controlling stake in cairn rather than Vedanta. However Vedanta`s move into oil would be an out of the blue shift from its core business and we think this would not be a strategic fit or synergies other than becoming an Indian resource conglomerate.
How should investors now trade in Sesa Goa, Cairn India and Sterlite Industries?
Soumen Ghosh: Sesa Goa will have a negative impact, since its balance sheet will be utilised for paying cash to fund Cairn`s acquisitions. On top of it, the acquisition is not expected to yield any benefit to Sesa Goa in foreseeable future. So overall, recommend not to make fresh investment in the stock after this event. Meanwhile, for Cairn India, the deal entails an open offer of Rs 355 a share ((+)Rs 50 a share as non compete fee) for the shareholders. It is much below the expected open offer price of Rs 400-410; hence it is a dampener for the existing shareholders. So, no fresh investment is advised after this event. The fact that Sterlite Industries balance sheet will not be utilised for the Cairn acquisition, has turned out to be a positive for the company. However, the stock will consolidate, once the euphoria regarding the acquisition subsides. So I see no substantial upside/ fundamentally positive value addition seen in near term.
Prashanth Tapse: Go long on Sesa Goa with stop loss of Rs 310. For Cairn, short term trading movement would be based on result of the above deal. We are positive on cairn core business because after Reliance, Cairn India is the country`s second-biggest private sector producer. We are also positive on the core business activity of Sterlite Industries but considering the above event we are a bit cautious and see some more downside levels near 145-150 in the short term.
Source : My iris
Popularity: 13% [?]
Category: Stock-News
Subscribe
If you enjoyed this article, subscribe to receive more just like it.
