19 August 2010

Vedanta's clever siddhanta -S. MURLIDHARAN

By timing its action before the new takeover code is implemented, Vedanta has side-stepped two potentially irksome issues — 100 per cent takeover and pricing parity for public shareholders.


The Achuthan panel report recommendations could perhaps have been at the back of the mind of the reclusive Anil Agarwal, the promoter of Vedanta Resources Plc, a company listed in the London Stock Exchange and which controls the Indian metals major Sterlite Industries Ltd when he decided to acquire a controlling interest in Cairn India Ltd from Cairn Energy UK with jet speed.

A staggering $9.6 billion would be forked out by Vedanta to Cairn Energy reportedly from the combined coffers of Vedanta and Sesa Goa, another group company of Vedanta in India which it acquired a few years ago. For all one knows, Vedanta is scouting for funds in the foreign markets, including in London, where takeover financing is otherwise granted generously but the environmental issues that have come to baulk some of Vedanta's plans in Orissa seem to have come in the way of raising the moolah.

Be that as it may, what Vedanta seems to be keen on is to rush before the new takeover code, assiduously worked out by the Achuthan panel, is brought into force to its detriment. Incidentally, the panel recommendations are still being mulled by the public whose reactions would be considered by SEBI (Securities and Exchange Board of India) before implementing them.

Foreign companies have acquired Indian companies in the past but this would be the first instance of a foreign company promoted by an Indian coveting an Indian company by, curiously in the process, wresting control from an unadulterated foreign company.

Successfully sidestepped

The panel has suggested two seminal changes that could strike at the roots of the takeover game in India. First, is the public offer requirement to buy out all the remaining shares from the public resulting in a 100 per cent buyout as opposed to the extant norm that requires buying out of a further 20 per cent of the voting capital of the company this time around from the public after having purchased at least 25 per cent from the promoter. Back of the envelope calculations show that the cost of acquisition of $9.6 billion could double to roughly $20 billion, making perhaps the acquisition not only the largest ever in India but also more disquietingly for Vedanta a pyrrhic victory. Vedanta obviously would not like to score such a pyrrhic victory.

Vedanta would also have reckoned with the grim prospect of having to pay Rs 405 per share to the Indian public shareholders, the price that it has agreed to pay to Cairns Energy UK if the new takeover code as recommended by the panel is implemented.

For, the panel has rightly put its foot down and recommended abolition of room for chicanery that consists in camouflaging 20 per cent of the negotiated price with the promoter (Cairns Energy UK) as non-compete fee which has nothing whatsoever to do with cost of acquisition of controlling interest.

The takeover history is replete with instances of the two sides in a negotiated deal playing footsie to rob the small shareholder of his rightful due. Now Vedanta too would profit from this chicanery — Rs 405 per share for Cairn Energy UK but only Rs 355 per share to the Indian public shareholders.

That Vedanta has not gone the whole hog — it could have pared down the price payable to the public by about Rs 80 — is as much a small mercy as it is a reflection of cold calculations; the public might lose interest in the public offer.

Be that as it may, the point is through its timely action, Vedanta has side-stepped two potentially irksome and burdensome issues — 100 per cent takeover and a parity of pricing for public shareholders. Vedanta obviously does not consider it prudent to assume a huge debt burden which would become inevitable if a company is to be acquired lock, stock and barrel. Furthermore, it knows pretty well that it has nothing to gain by making Cairn India a closely-held company.

Daiichi Sankyo walked into the space vacated by the Singh brothers in Ranbaxy. In other words, the existing promoters were asked to ship out completely. Their entire 34 per cent holdings were acquired.

On the contrary, Vedanta has agreed to allow Cairn Energy UK to have a toehold in Cairn India Ltd by allowing it to retain a minimum of 10.6 per cent stake. One wonders why. Is this a huge display of naiveté?

In any case, this flies in the face of non-compete fee and indeed in a way gives a lie to such a claim. It is indeed odd to find quarter being given to the one who has been paid a non-compete fee. Non-compete fee and continued interest in the business are incompatible phenomena.

That Cairn Energy would continue to stay invested in Cairn India belies its claim of having received non-compete fee from Vedanta and proves that it was only making life that much easier for the acquirer by playing footsie with it.

Apart from the chicanery involved in camouflaging a good chunk of the negotiated price as toward non-compete fee, staying put in an acquirer's company albeit in a minor capacity gives the outgoing promoter enough power to constantly breathe down the neck of the acquirer when his purported intention is to break free of him.

People in the know have all along known that non-compete fee in the context of takeover is a pure hogwash but one is at a loss to find a savvy businessman exposing himself to the potential danger of being constantly snapped at the heels by the one who has sold out. Even if the claim of non-compete agreement were to be believed, it is a tad ironical that the acquirer would not brook competition from the seller but would stoically put up with his intrusive presence inside the company.

(The author is a Delhi-based chartered accountant.)

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