Vedanta confirms no change in swap ratio despite stock price fall

Vedanta Ltd has said it stands by the share swap ratio, proposed as part of the plan to merge Cairn India Ltd with itself, despite a near 30% fall in the share of Vedanta since the merger was announced last month.

“Swap ratio is not only based on the market prices of the shares but it also take into consideration various other factors such as intrinsic value of the companies taking into account the long term assessment of the business. Nothing has changed on those factors post announcement for valuers to change their report,” said Tom Albanese, chief executive officer of Vedanta, in an emailed reply to Mint.

Since the announcement of the proposed merger on 14 June, Vedanta shares have fallen 27% due to concerns over its aluminium business. Cairn shares have done relatively better and fallen about 3%. This has widened the differential between the two stock prices, making a 1:1 swap ratio seem unfavorable to Cairn shareholders.

As per the terms of the merger, for each stock held, shareholders of Cairn India will get one ordinary share and minority shareholders will receive an additional 7.5% redeemable preference share of Vedanta, which can be redeemed at the face value of Rs.10 at the end of 18 months. The transaction represents a 7.3% premium to Cairn India’s 12 June closing stock price.

However, this equation has now changed as Vedanta shares have fallen to Rs.132.60 apiece as on Friday, while Cairn India closed at Rs.174.90 per share.

Albanese, however, countered investor concerns over the impact of falling aluminium prices on Vedanta saying that a good asset can weather the storm. “In our sector, these cycles do come but the assets which are built are long life assets and we are very confident that these would provide good returns to all shareholders when the cycle reverses,” he said.

Aluminium contributed about 12% to Vedanta’s operating profit. Aluminium prices on the London Metal Exchange (LME) are at six-year lows, which has led to a fall in margins for the company’s aluminium business. Concerns over the impact of the fall in metal prices on Vedanta’s business could give minority investors more reason to oppose the proposed merger.

On the sidelines of the Cairn India annual general meeting (AGM) held in Mumbai, a representative of United India Insurance Co. Ltd said the firm opposed the merger and the arrangement between Cairn India and Vedanta.

To be sure, United India Insurance holds a less than 1% stake in Cairn India. However, recent reports have suggested that other shareholders may have reservations about the proposed deal as well.

“We are in continuous engagement with shareholders and most of them are yet to take any decision,” said Albanese. “In all cases, people recognize that it is still very early to make a decision. Shareholder meeting to consider the merger proposal is few months away,” he said.