Sesa Goa drained full of Cash it has and will have too !…. to Invest US $ 3 Billion for a 20% Stake in Cairns India…. both drop sharply by over 8% to Rs 321 and over 6% to Rs 333 respectively

How should one now view and play Sesa Goa and Cairns India ?

Markets have been excited for a few days by the Vedanta Group buying out the controlling stake in Cairns India from a subsidiary of Cairns Energy….. Cairns India had raced away to a new High of Rs 368 yesterday morning….. then came the press release by the Vedanta Group announcing this takeover in detail

My initial reaction was one of anger and worry that, as feared, Anil Agarwal of Vedanta was using Sesa Goa Cash for the Group

The Markets reacted sharply and Sesa Goa dropped over 8% to Rs 321 while Cairns India dropped over 6% to Rs 333

The takeover is by the Vedanta Group in this manner

  • Vedanta Resources plc will acquire 51% Equity Stake in Cairns India from a subsidiary of Cairns Energy at Rs 355/share + Rs 50/share as Non Compete Fee for Three Years
  • Sesa Goa, a Vedanta Group Company will tender for 20 % Equity Stake from the remaining Cairns India Shareholders at Rs 355/share… this is the mandatory Open Offer
  • In case Sesa Goa receives less than 20% then Vedanta will make up the difference at cost… that’s Rs 405/share

My immediate concern is what will be the Impact on Sesa Goa as it has been my pet recommendation for several years now and recently very strongly from July 2008 cum bonus and cum split at Rs 3200 (that’s Rs 160 ex)…. On April 8, 2010, Sesa Goa zoomed to an all time high of Rs 494 for a FV Rs 1 Share as Iron Ore Prices crossed US $ 140/t

This acqusition will cost over US $ 9 Billion of which Sesa Goa will be investing from it’s cash resources US $ 3 Billion for a 20% stake…. it does not even have this on it’s Balance Sheet currently !….. The Drop in Share Prices of both Sesa Goa and Cairn India reflect the concerns that Investors have on Vedanta’s Corporate Governance and Credibility

Let’s have a quick look at whether such a reaction is a precursor to a further drop in the share prices of both

This is not an overnight acqusition….. negotiations must have commenced months ago with Cairns Group…. connect this with the uptick in Cairns India’s Share Price…. it moved from a range of Rs 150-Rs 200 a year ago, to Rs 200-250 and then from Rs 250-Rs 300 and yesterday zoomed to a High of Rs 368 before reacting to close at Rs 333

So what is Sesa Goa’s role in this Acquisition

Vedanta simply wants US $ 3 Billion from Sesa Goa….it would have created a ruckus to simply borrow all of this inter group…so part of the acquisition of Cairns India to the extent of 20% of the Equity Capital of Cairns India that,’coincidentally’ amounts to US $ 3 billion is to be shown as an Investment in the Books of Sesa Goa

Cairns India has a Share Capital (FV Rs 10)of Rs 1897.34 crs…. 20% of this is Rs 379.5 crs thats 37.95 crs number of Shares… to be exact 379496447 shares…. at Rs 355 that’s Rs 13471 crs…. at the agreed Exchange rate of US $ 1=Rs 46.765 that’s US $ 2.88 Billion…. This is expected to come in from the mandatory open offer of 20% that needs to be made to remaining shareholders….. any shortfall will be purchased from Vedanta’s 51% acquisition… but at a higher price of Rs 405, that’s Vedanta’s cost read more