It is hard to say what will be the final outcome of the proposed Cairn-Vedanta deal but one thing comes out crystal clear. The minority shareholders are having a major voice in merger deals. But, first some background.
The recent amendments to the M&A rules in India specifically require approval for any merger from a majority of the minority shareholders. Let us understand this a little further.
LIC, Cairn UK and Vedanta
These will the 3 key parties in this minority versus majority debate. Vedanta is already the majority shareholder in Cairn India with a 60% stake. Among the minority shareholders of Cairn India, the key names are LIC and Cairn UK. Out of the balance 40% (not held by Vedanta), LIC and Cairn UK hold close to 19%. It will not be possible for the merger proposal to pass through, unless both LIC and Cairn UK accede to sign on the dotted line. But, why are they averse to it?
LIC is looking at it from a purely valuations perspective. According to LIC, since Cairn India has a higher book value compared to Vedanta, a 1:1 merger is unfair to shareholders of Cairn India. Cairn UK also has a valuation argument, but their objection is more about the portfolio of assets that they want to hold. Cairn UK is quite clear that it would like to focus only on oil assets and does not want to spread its portfolio across a variety of commodities. That is exactly what Vedanta offers.
Can they change the outcome?
Interestingly, both Cairn UK and LIC realize that Vedanta wants the merger badly. It will be a much more efficient way of using the cash reserves of Cairn India to defray the debt of Vedanta. In the case of HZL, the situation is much more complex as the government has to give the approval for the merger. Vedanta will be keen to ensure that the deal does not fall through. In the process, if Vedanta has to sweeten the deal, it will still be a job well done.
A game-changer for shareholders
For a long time the average minority shareholder hardly had a voice. This amendment gives that added power. Institutional shareholders like LIC will become a lot more vocal in demanding greater value from such deals. In fact, like in the US, shareholders can become a lot more active and demanding.
In the US large investors like Carl Icahn have compelled cash-rich companies to pay higher dividends and return capital to shareholders through buybacks. The Cairn-Vedanta deal will be a kind of a test case for greater activism and participation of minority shareholders. In the process the average shareholder gets more “Bang for the Buck”! ©
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