Cairn's public investors to lose Rs 3,570 cr

Public shareholders of Cairn India will lose out on a whopping Rs 3,570 crore (Rs 35.7 billion) to the promoters who would be only beneficiary of a non-compete fees to be paid by its suitor, London-listed Vedanta group.

The non-compete fees, which market regulator SEBI had already proposed to abolish, are a common phenomena in takeover deals, and are paid only to promoters and other shareholders get no share of this pie.

The fee is paid by the acquirer to the promoters of the target company for not entering the same trade, and such payments could be as high as up to 25 per cent of the deal value.

In the Vedanta-Cairn deal, the fee works out to be around 15 per cent of the total size. In Cairn India's $8.48 billion takeover by the NRI billionaire Anil Agarwal-led group, shareholders who would be missing out on this payment include state-run insurer LIC (which holds 2.57 per cent stake) and Malaysian energy major Petronas (14.94 per cent).

As part of the deal, the promoters will get non-compete fees totalling about Rs 6,000 crore (Rs 60 billion).

The non-promoter shareholders, with their over 71 crore shares amounting to a 37.64 per cent equity, would have got Rs 3,570 crore (Rs 35.7 billion) had the non-compete fees also been paid to them.

Vedanta on Monday announced a deal to acquire a majority stake of up to 60 per cent in Cairn India, promoted by Edinburgh-based Cairn Energy with a 62.37 per cent stake.

Cairn Energy Plc said it will sell a minimum of 40 per cent and a maximum of 51 per cent stake to Vedanta for a price of Rs 405 per share.

For other shareholders, Vedanta will make an open offer at Rs 355 per share for up to 20 per cent stake.

The price offered to the Cairn Energy includes a Rs 50 per share non-compete premium for Cairn Energy Plc in lieu of a commitment to not to enter into oil and gas business in India, Pakistan, Bhutan and Sri Lanka.

Following recommendations from a high-level panel set up to overhaul the takeover regulations, SEBI last month proposed that the non-compete fee, if being paid by the buyers, should be available for all the shareholders.

SEBI is currently seeking public comments to formulate final regulations in this regard. The deal is subject to various regulatory approvals, including by the SEBI.

Meanwhile, the British shareholders of Cairn Energy Plc will become richer as most of the $8.48 billion that Edinburgh-based firm will get from selling majority stake in Cairn India will go to them, a repeat of 2006 when money raised from India listing were paid to them.

Cairn Energy Plc Chief Executive Bill Gammell said: "A substantial amount" of the $8.48 billion proceeds from sale of up to 51 per cent stake in the India unit to mining group Vedanta Resources would be "returned to Cairn (Energy Plc) shareholders."

Gammell himself will be a big beneficiary as the number of shares directly held by him have risen ten-fold to 3,931,778 as on March 16, 2010 from 371,302 on September 25, 2009, according to the company's website.

His shareholding is, however, less than a per cent.

Cairn Energy Plc holds 62.37 per cent stake in Cairn India, its mainstay subsidiary that has three producing assets in India including the giant Mangala oilfield in Rajasthan block.

In fact, in 2005, Cairn Energy had offered its interest in the Rajasthan and other fields in India to state-owned Oil and Natural Gas Corp for close to $5 billion, but when the PSU did not agree with the valuation, it floated a India unit and listed the firm on the stock market.

The initial public offer of Cairn India raised about $2 billion, the biggest beneficiary of which was again the overseas shareholders of Cairn Energy.

About $1.3-1.4 billion out of the IPO proceeds were paid to UK-listed firm's shareholders.

Incidentally, Cairn India was the only cash profit generating subsidiary in the portfolio of Cairn Energy.

The company has exploration assets in Greenland. Cairn India produces 125,000 barrels per day from Mangala, the largest onland oilfield in the country, and the output has the potential to rise to 150,000 bpd (7.5 million tons a year).

From the Rajasthan block, the company expects to produce about 240,000 bpd (12 million tons), almost equivalent to what ONGC produces from its prime Mumbai High fields.

US-based BlackRock Investment Management holds 11.22 per cent in Cairn Energy while HSBC Global Asset Management has 8 per cent interest.

Scotland's leading independent investment manager Baillie Gifford holds 6.22 per cent, UK's Legal & General Investment Management 5.41 per cent, F&C Asset Management 3.70 per cent, Walter Scott & Partners 3.54 per cent, Schroder Investment Management 3.36 per cent and Fidelity Investments 3.97 per cent.

In 2010, when Cairn India made handsome profits, Gammell's basic salary increased to 600,000 British pound from 552,000 pound in the previous year.