Mining giant Vedanta Resources
Edinburgh-based Cairn Energy
India-focused Vedanta will offer to buy up to 20 percent of Cairn Energy, whose main assets are in Rajasthan, from other shareholders to give it a stake of between 51 and 60 percent.
A sale price of $8.66 per Cairn India share represents a 32 percent premium to the average price over the last 90 days and will leave Cairn Energy with a cash pile of up to $8.5 billion and a retained stake of at least 10.6 percent.
That compares with the roughly $3 billion Cairn Energy Chairman Bill Gammell said it had invested in Cairn India.
Mumbai-listed Cairn India, the country's fourth-largest oil and gas company, currently produces about 125,000 barrels of oil per day (bopd) but Vedanta said it had the potential to produce more than 240,000 bopd -- around 25 percent of India's output -- allowing it to benefit from rapidly growing fuel demand.
The proposed acquisition significantly enhances Vedanta's position as a natural resources champion in India, said Anil Agarwal, the billionaire chairman of Vedanta and the group's biggest shareholder with a 61.2 percent holding.
Vedanta will join BHP Billiton
With this deal, Vedanta is looking to become a company with the scale of something like BHP Billiton, said Alex Mathews, head of research, Geojit BNP-Paribas Financial Services, in India. It shows the company wants to be become a major resources player.
Cairn India's main asset is a 70 percent stake in the Rajasthan oil development project that holds an estimated 6.5 billion barrels of oil and gas. Rajasthan is where Vedanta's zinc operations are located.
The (Cairn Energy) shares should react positively to this news but they remain at a premium (albeit at a far more modest level) reflecting the upside potential from Greenland where an update on the first two high-impact wells is due next week, said Richard Rose, an analyst at Oriel Securities.
Shares in Vedanta, which fell around 20 percent last week as speculation over a Cairn deal raised concerns about funding, were up 4.8 percent at 0753 GMT. Cairn Energy shares were up 2.4 percent.
For Cairn Energy it seems like a good deal to me and Vedanta, though it is their first foray into oil and gas business, it is yet another commodity business for them apart from metals and ores, said Deepak Jasani of HDFC Securities in Mumbai.
Vedanta will hold 31-40 percent of Cairn India directly and Sesa Goa Ltd
The open offer will be financed by cash while the remainder will be funded by debt.
Cairn said it expects to complete the deal before the end of 2010, while Vedanta has been more conservative and is targeting the first quarter of 2011.
(Editing by Tom Bergin and Jon Loades-Carter)