India-focused Vedanta Resources is in talks to buy a stake in Cairn India that would be the diversified miner's first move into oil and gas, with funding for a deal likely to be a key issue. Vedanta and British oil and gas company Cairn Energy, which has a 62.37 percent interest in Mumbai-listed Cairn India, confirmed on Thursday they were in talks.
Cairn India, the fourth-largest oil and gas company in the country, was valued at $13.6 billion at the close of trading on Wednesday, valuing Cairn Energy's stake at $8.5 billion. "The big question now is how big this stake is going to be and how are they going to structure the deal," said Liam Fitzpatrick, an analyst at Credit Suisse. "It will probably be more of a minority interest," he said, noting that Vedanta is already relatively highly geared.
Numis analyst Sanjeev Bahl said he thought Cairn Energy would likely sell a small stake of around 5 percent, similar to the 6 percent it sold in Cairn India in March 2008 and the 2.3 percent stake it offloaded in October 2009. "If you have a look back historically Cairn have always sold down stakes in Cairn India to realise a bit of capital," he said.
Cairn Energy shares were up 1.5 percent at 1353 GMT, while shares in Vedanta were down 6.4 percent as analysts questioned its ability to afford a large acquisition. Credit Suisse is already predicting capital expenditure for Vedanta of $10 billion over the next three years.
"A move into oil would be a very strange shift away from Vedanta's core business of developing mines and smelters," analysts at Credit Suisse wrote. "We therefore struggle to see any strategic fit or synergies." BHP Billiton is the only large mining company to have a significant interest in oil.
Richard Rose, analyst at Oriel Securities, agreed that the key risks in any deal would include concerns over any cash requirement given Vedanta's "relatively stretched" balance sheet. A huge oil find in Rajasthan helped propel Cairn Energy from a small company to a major oil producer and led it to spin off the Indian operations. Vedanta's confirmation of talks could incite interest from other bidders.
"It's a very good business and the main asset in Rajasthan is of a scale that would be of interest to even the bigger companies out there," said Richard Slape from Canaccord Genuity. "I would have thought that anybody wanting to purchase Cairn Energy's stake would want control of Cairn India, which would certainly mean they'd have to sell the majority of their interest if not all of it," he said.
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