Vedanta’s Indian oil interest is hard to fathom

August 12, 2010

Vedanta Resources’ Indian oil interest is hard to fathom. No doubt Cairn Energy will have plenty of ideas for any cash it may raise by selling a stake in the UK oil explorer’s Indian subsidiary. But it’s harder to see what Anil Agarwal’s mining group has to gain from dipping its toe into the oil business.

Vedanta’s interest is in Cairn India, which pumps oil in the Rajasthan desert and has had a separate listing since January 2007. A full takeover would be a stretch. Cairn Energy’s 62 percent stake is worth $8.5 billion at current market prices. Add in a control premium, and a possible offer to minority shareholders, and a deal could easily cost twice that amount.

True, Vedanta’s net debt at the end of March was just $900 million. But it would struggle to finance a purchase while maintaining its coveted investment-grade credit rating. Issuing equity is complicated by Agarwal’s determination to keep control of the business. A share sale that diluted his 61 percent stake to just over 50 percent would not raise much more than 1 billion pounds.

One option is for Cairn to sell a 12 percent stake in its Indian business. This would allow it to retain control, while freeing up cash for its Capricorn exploration arm to go in search of new projects in other parts of the world. At Cairn India’s current share price of 340 rupees per share, the stake would cost Vedanta around $1.7 billion. It would also keep Vedanta below the 15 percent level at which Indian takeover rules would require it to make a public offer to buy a further 20 percent.

That would be a more palatable option for Vedanta’s creditors. But it wouldn’t answer the question of what Agarwal hopes to gain from getting into the oil game. He may be looking to create an Indian version of BHP Billiton, combining mining assets with oil fields. But it’s hard to see any real synergies between oil production and refining and Vedanta’s aluminium, copper, zinc and coal businesses. A minority shareholding would make even less sense.

Agarwal’s controlling stake puts him in a strong position to pursue his ambition. But judging by the 7 percent drop in the company’s share price following confirmation of the talks, Vedanta’s other shareholders will take some convincing.

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