Cairn Energy's recent decision to lower the cost and split the sale of its Indian subsidiary, Cairn India, to Vedanta Resources is positive for the closure of the deal, and is seen by analysts as an acceptance by the two UK companies of India's condition on royalty payments.
Reducing the deal value is being read as an acceptance by both parties of the oil ministry's condition that Cairn India should share the royalty payment on crude oil produced from the Rajasthan fields for the deal to be approved, India-based analysts said.
"They would have changed the price to let the deal close," Sandeep Randery, an analyst with Brics Securities, said Tuesday.
Cairn Energy on Monday said that it has amended the terms of its sale of a controlling stake in Cairn India to Vedanta Resources. Cairn said it had now agreed that the deal would take place in two stages, with an initial sale of 10% of Cairn India, and the subsequent sale of a further 30% which remains subject to government approval by the Indian government.
Cairn Energy also said it had agreed to other adjustments including the removal of non-compete clauses and associated fees, which are expected to result in a 5.3% cut in post-tax proceeds from the sale.
The sale price has now been reduced from $8.66 per Cairn India share to $7.85/share.
Cairn Energy amended the terms of sale after failing to get the Indian government's approval for the original transaction, announced in August 2010, under which the company had agreed to sell a maximum of 51% of Cairn India to Vedanta for up to $8.5 billion.
The main hurdle to the deal has been the issue of royalty payment on the prestigious Rajasthan field, in which state-run Oil and Natural Gas Corporation is Cairn India's partner.
Though ONGC only has a 30% stake in the fields, it has been paying full royalty in compliance with the production sharing contract, which has some archaic rules having been signed before the government implemented its New Exploration Licensing Policy.
ONGC and the Indian government are believed to be keen to use the change in the Rajasthan assets' ownership to amend the terms of the PSC.
"It is better to take a conciliatory approach to regulators than being contradictory. It is a well balanced adjustment to the deal structure," Jagannadam Thunuguntla, head of research at SMC Global Securities, said Tuesday.
Thunuguntla was commenting on the climbdown by Cairn -- to accommodate the possible reduction in cash flows for Cairn India due to the royalty payment -- by reducing the transaction price.
Even if the deal is not approved immediately, Vedanta's position in Cairn India get stronger with the 10% stake it has decided buy upfront from Cairn Energy, the analysts said.
After the closure of the 10% stake sale, which is expected by July 11, Vedanta Resources would hold 28.5% of Cairn India. This includes the 10.4% stake it bought from Malaysia's Petronas in April and an 8.1% stake it bought in an open offer to Cairn India shareholders.
Cairn Energy will be left holding a majority 52.2% stake in Cairn India following the 10% stake sale to Vedanta next month. The remaining equity in Cairn India is held by retail and institutional investors.
Meanwhile, India's Cabinet Committee on Economic Affairs is due to discuss the deal Thursday, according to Indian media reports, but this could not be confirmed.
