Cairn Energy’s plan to raise £5 billion through the sale of its majority stake in Mumbai-listed Cairn India to Vedanta Resources is at risk of hitting the buffers after a refusal by certain banks to back the deal on environmental grounds.
London-listed Vedanta Resources, controlled by Indian-born Anil Agarwal, is said to be struggling to put together a consortium of banks willing to underwrite the $6.5bn (£4bn) it needs to borrow in order complete the acquisition.
Although Royal Bank of Scotland, Standard Chartered and Barclays are all reportedly on board, several lenders have “shunned the deal on environmental grounds”, according to Thomson Reuters’ International Financing Review. This is the most concerning of numerous stumbling blocks that could scupper the deal.
Vedanta has been heavily criticised for its approach to sustainability and health and safety by groups such as Amnesty International and Survival International. The Indian Government last week blocked the expansion of the company’s alumina refinery in the country’s eastern region of Orissa as a result of environmental concerns, its third such move in recent months.
The mining company last week acknowledged that its reputation for environment degradation might be holding it back commercially when it appointed a chief sustainability officer. It hired Antony Henshaw, previously corporate vice-president of sustainability at Mexico’s Cemex, the world’s third-largest cement maker, for the new role.
With banks increasingly concerned about being tarnished by association, Vedanta might have to follow up with a clear action plan and timeframe to address social and environmental issues if it wants to get a deal through.
When Cairn announced the sale of a maximum of 51% in the Indian business to Vedanta on August 16, the company expected the deal to be completed by December 31. But chief executive Bill Gammell has since acknowledged this deadline will not be met, saying last month said the deal would not complete until the first quarter of 2011.
Other setbacks facing the deal include delays in getting approval from Vedanta shareholders, regulatory concerns and the opposition of Cairn India’s joint venture partner, the state-owned Oil and Natural Gas Corporation (ONGC).
The mining company originally expected to obtain shareholder approval by 20 October, but the general meeting has been put back by at least three weeks, following the failure of the UK Listing Authority, part of the Financial Services Authority, to approve Vedanta’s shareholder circular.
This UKLA approval is dependent on approval coming through from the Indian ministry of petroleum and natural gas, part of the department of mines, which has not yet rubber stamped the deal.
Cairn India / Vedanta deal needs buy in of Indian “high ups”
Nathan Piper, oil and gas analyst at RBC Capital Markets, said that this latter approval will require the boards of Cairn and Vedanta to convince “high-ups” in the Indian establishment the deal ought to proceed. The fact the deal was announced following a private meeting in Edinburgh between Gammell and Agarwal in the summer, without Indian Government sources being courted in advance, means Cairn and Vedanta have got some important catching up to do.
“Some Indian bureaucrats still see India as a Soviet-style command economy and any oil in the country as a national asset,” said Piper. “The fact Cairn is buying and selling that oil from under their noses frustrates them, to be frank. There’s also a a degree of anger at the way the original announcement was handled.”
Vedanta’s environmental reputation and lack of experience in the oil and gas sector have been cited as factors the authorities will take into consideration when weighing up their decision.
The Times of India has also claimed the Indian government is coming under political pressure to block the deal on the grounds that it fuels profits at a foreign-owned private enterprise at the expense of a state-owned company, ONGC.
ONGC for its part has been vociferously claiming a right of first refusal and that it must give its formal consent if the deal is to proceed, but Cairn disputes this. In a letter to ONGC last Thursday, Cairn said ONGC has no pre-emption rights since the Cairn-Vedanta deal is a “share transaction” between two companies as opposed to an asset sale. That tussle may yet end in court action, according to some investors.
Piper said ONGC is basically seeking to renegotiate the unattractive terms of contracts it entered into with Cairn at a time when the oil price was much lower in the early 2000s. Piper said: “In my view ONGC is using this deal as an excuse to renegotiate terms relating to royalty payments.
“They’re trying to make the most of the circumstances.”
If the Cairn India deal were to collapse, it would be a severe blow to Cairn, which needs the proceeds to fund deepwater drilling for oil and gas elsewhere in the world including in “iceberg alley” off the Greenland coast. It could also harm India’s reputation as a business-friendly climate that enables foreign investors to withdraw profits and capital.
Piper concluded the issue with Vedanta’s bankers was the most serious facing the deal.
“If it does fall apart, it’s not going to be because of ONGC or the Indian government failing to give approval. Instead it’s going to be because Vedanta cannot raise the $6.5bn. That is the more practical concern,” he said.
Cairn’s shares have collapsed by 22% from 493p when the deal was announced on August 16 to 385p on Friday. Over the same period Vedanta’s shares have risen 0.3% 2153p to 2227p.
Cairn declined to comment, and Vedanta was unavailable for comment.
This article was published in the Sunday Herald on 7 November 2010