Vedanta Rejigs Cairn Deal, to Buy 10% More

Vedanta Resources Plc will buy another 10% in the Indian arm of Cairn Energy Plc as part of a restructuring of the much-delayed deal that will result in a $600 million reduction in the price tag. The rejig, announced late on Monday evening, was necessitated because the Anil Agarwal-led company had agreed that a part of the taxes paid by the 30% shareholder, state-run explorer ONGC, could be deducted from revenues, according to three people with direct knowledge of the matter. The tax, known as royalty, is currently paid entirely by ONGC and the government had insisted that its burden had to be reduced before it approved the deal. 

Both Cairn and Vedanta have resisted this, but eventually had to give in as the government would not budge, the people said. Cairn agreed to remove the non-compete fee of 50 per share to sweeten the deal for Vedanta, as payment of royalty would make the transaction less attractive for it.Vedanta has decided to acquire the additional 10% equity in Cairn India immediately and wait for the government's nod to close the transaction by acquiring another 30%, both companies announced in separate statements. The 10% sale transaction will be completed on or before July 11, raising Vedanta's stake in Cairn India to 28.5%. At this state, Cairn Energy will retain 52.2% in Cairn India. The transaction will close only when Vedanta gets government approval to buy a further 30%, raising its stake to a controlling 58.5%.Compromise over Royalty Needed for Cairn Deal 
The spokesmen of both companies declined to say why they were renegotiating the deal. But people close to both sides say a compromise over the royalty issue was needed to conclude the transaction which was first announced more than 10 months ago. 
"The removal of the non-compete fee will result in a reduction in the effective sale price from $8.66 per Cairn India share to $7.85 per Cairn India share," the Cairn Energy statement said. 
This change in price applies to both the initial sale of 10% and the subsequent sale of 30% stake in Cairn India. Gross proceeds for the sale of a 40% interest in Cairn India will amount to $6.02 billion with net proceeds expected to be approximately $5.4 billion in cash, it said. 
Vedanta Executive Chairman Anil Agarwal said: "Vedanta believes this initial 10% purchase is a further demonstration of its commitment to India. We look forward to the successful completion of the proposed transaction." Cairn Energy Chief Executive Bill Gammell said: "Cairn continues to believe the necessary approvals to complete the Vedanta transaction will be received and is working with the government of India in a positive and constructive manner." 
The $4-billion royalty obligation relates to oil-producing assets in Rajasthan, where Cairn is the operator with 70% stake and ONGC holds the remaining 30%. Under the terms of a 15-yearold contract for the block, ONGC pays Cairn's share of royalty, but the stateowned explorer has cited a clause in the same contract to claim that the cost of royalty can be recovered from the total revenue of the field before profit is calculated. 
Cairn has contested this reading of the contract and had argued that accepting this would reduce valuation of the Cairn-Vedanta deal significantly and potentially derail it. 
Last month, a ministerial panel led by Finance Minister Pranab Mukherjee had said the government could approve the deal only if Cairn and Vedanta accepted the condition on royalty and if Cairn ended arbitration proceedings over payment of cess, another tax. 
Cairn and Vedanta executives had said at the time that these conditions would significantly reduce the deal's valuation and the transaction would collapse. In a letter to the government on April 18, Gammell had said the preconditions would "inevitably cause the proposed transaction to fail". 
Oil Minister Jaipal Reddy has said on several occasions that he 'strongly' supports ONGC's stand on the royalty issue as it was a matter of 'national' interest. 
A person close to Vedanta said "the company is willing to make some adjustments in national interest". 
The government and ONGC officials had said they couldn't support a private deal against the interests of a state-run firm. "The ONGC board had passed a resolution in January that royalty payment in the Rajasthan block is cost recoverable as per the production sharing contract," a senior ONGC official said requesting anonymity. 
Cairn and Vedanta have agreed to certain adjustments to the transaction sale and purchase agreement for the sale of part of Cairn Energy's shareholding in Cairn India, involving the removal of the non-compete arrangements and associated fee, which are expected to result in a 5.3% reduction in post-tax proceeds, Cairn said in its statement. 
Cairn and Vedanta have also agreed that completion of the transaction will take place in two tranches: an initial sale of a 10% stake in Cairn India, and a subsequent sale of a 30% stake which remains subject to receipt of necessary consents and approvals from the government.