Vedanta in talks to buy into Cairn India to fuel new biz

VEDANTA Resources has signalled a shift in its corporate strategy of focusing only on metals and power generation, by opening talks with UK-based oil major Cairn Energy to buy a part of its stake in the Indian arm. The negotiations, which are still at an early stage, could gross $1.5 billion if the talks are fruitful, people familiar with the development said Cairn Energy is also believed to be talking to other players, including some large Indian and global resource firms, as part of its fund-raising plans.
    According to Vedanta, its talks with Cairn Energy are still at an early stage and may not result in a deal "Discussions are ongoing and there can be no certainty the contemplated acquisition will occur, or of the terms of any such acquisition," the company said in a statement. "A further announcement will be made when appropriate."
    Vedanta has so far focused on its core metals mining and power generation business despite robust cash reserves of nearly $7.5 billion. The move to acquire stake in an oil business indicates the company's willingness to have a presence in all segments of the resources industry.
    Vedanta, through various group companies, is one of India's leading producers of zinc, aluminium and copper. The company's negotiations are to buy a part of Cairn's 62% stake in Cairn India, say around 10%, and increase it later.
    Indian government officials have been made aware of the talks. Cairn India CEO Rahul Dhir is set to meet Union petroleum secretary S Sundarasen on Friday, and Cairn is also expected to be a part of the discussions, said people familiar with the development.
    According to clause 28.2 of the model production-sharing contract, companies that have acquired exploration blocks under the New Exploration Licensing Policy need to inform the government of any change in shareholding pattern.
    "The government needs to be assured that the new stakeholder is financially credible and is in a position to meet all liabilities and guarantees," said the petroleum ministry officials. The UK energy major was guarded in its comments. David Nisbet, a spokesman of Cairn, said, "At the moment, we have only initiated talks. There are confidentiality agreements and this is all we can say at this moment."
SPREADING WINGS
Branching Out : Vedanta has been scouting for possible buys in the oil and gas sector for the past two years, in an attempt to diversify from its core metal play.
Deep Pockets : With cash reserves of about $7.5 billion, Vedanta is seen well placed to pick up a stake.
Digging Deep : Cairn Energy Plc is looking to raise funds for its plans to drill exploration wells off the coast of Greenland.
Options Open : Cairn Energy Plc is reportedly in talks with other companies, including large Indian and global resource firms, as part of its plan to raise funds for future expansion. News surprises market
NEWS of Vedanta's talks, however, surprised the market. "Vedanta is probably dipping its feet to test the waters," said P Phani Sekhar, a fund manager with Mumbai-based Angel Broking. "They will make a financial investment from a strategic point of view to see how it pans out. If it does well, only then they might take a serious look at energy resources," he added.
    Vedanta has been exploring diversification plans for some time now. According to the people cited earlier, the metals company has been looking at the oil and gas sector for the past two years, as it is a major part of the energy resource umbrella.
    Shares of Cairn India ended up 2.4% at 340.60 on BSE, on a day when the broader index rose only marginally.
    Vedanta chairman Anil Agarwal, ranked 10th on the annual Sunday Times Rich List of the wealthiest people in the UK, made his fortune mainly by acquiring state-owned facilities and turning them around through strong controls over costs.
    In an interview with ET NOW, Deepesh Pandey, co-head of investments at IIFL Capital, said: "The group (Vedanta) is fairly ambitious, aggressive and since you are sitting on a lot of capital, this is a move which could possibly happen. So we will have to wait and watch. It is just an expression of intent. It is still too early to speculate what they would intend to do but they definitely have the capital and the ambition to do this."
    Cairn Energy needs money to fund its drilling plans in exploration wells off the coast of Greenland. International media reports suggested that Cairn is betting $400 million this year on striking oil off Greenland. The waters off the icy coasts may hold 50 billion barrels of crude and gas, according to the US Geological Survey, enough to meet Europe's energy demand for two years.
    In 2009, Cairn Energy sold 10% to Malaysia's Petronas.
    Cairn entered India as an investor in 1998-99 by buying into the Ravva field from Australian-based Command Petroleum. In December 2006, Cairn India raised $2 billion through a public offer. It currently produces 180,000 barrels of oil equivalent daily from its operations, including Barmer, Rawa and Mangla.
    The company's first success was in 1998-2003 when it struck oil in onland Barmer, Rajasthan, which Cairn had bought from Shell that had abandoned the block after failing to find oil or gas. Two years down the line, Cairn struck the biggest onshore oil find for India in the last 20 years in the same Rajasthan block.