MUMBAI Vedanta Resources' (VED.L) up to $9.6 billion offer for control of Cairn India (CAIL.BO) looks set to face hurdles, including a possible counter-bid from a consortium of Indian state-run energy firms.
The Indian unit of Cairn Energy (CNE.L) has production-sharing contracts with the government for oil and gas exploration blocks, and the agreement says any ownership change will need federal approval.
Cairn India holds a 70 percent stake in an oil block, called RJ-ON-90/1, in the western Indian state of Rajasthan, while Oil and Natural Gas Corp (ONGC.BO) holds the balance. Approval from the state-run partner is required for any change of ownership.
An oil ministry source told Reuters on Monday all options were open for Indian state energy firms to make a counter bid for Cairn India.
A banking source familiar with the matter told Reuters that ONGC, GAIL (GAIL.BO) and Oil India (OILI.BO) -- all state-controlled -- were considering a joint bid for Cairn India.
Following are scenarios on what might happen to the deal:
ONGC, OTHER STATE FIRMS MAKE COUNTER-BID
Most analysts do not expect ONGC and other state energy firms to launch a counter bid.
Vedanta's offer values Cairn Energy at about 17 times one-year forward earnings per share, according to Thomson Reuters Starmine estimates, and analysts say a higher bid would make the deal expensive -- at a time when ONGC and other state firms are aggressively looking to buy overseas assets.
"It's not that ONGC and other state companies can't raise $10 billion for a counter-bid, but the main issue is if they invest this amount on new overseas assets that will create much more value," said Jagannadham Thunuguntla, equity head at SMC Capital.
ONGC and Petrovietnam are expected to submit a joint formal offer within weeks to buy BP's (BP.L) stake in the Nam Con Son gas project, Oil Secretary S. Sundareshan had said on July 27.
Government officials have expressed concern about Vedanta's proposed purchase of Cairn India. The country's trade minister said on Tuesday ONGC should have a say in the deal.
VEDANTA/CAIRN INDIA AGREE TO PAY ROYALTY
Even though Cairn India is the operator of the Rajasthan oil block with a majority interest, it is ONGC that is liable to pay royalties to the government on the entire crude production from the block.
ONGC has said previously it wants the government to reimburse it for royalties it would have to pay beyond its 30 percent stake in the block.
Analysts say the government, ONGC, Vedanta and Cairn India may work out a deal under which Cairn India agrees to pay royalties for its 70 percent share in the block.
In August 2009, Cairn India began pumping crude from the Mangala oil field in the Rajasthan block. Cairn Energy made the discovery in 2004 -- the first major oil discovery in the energy-hungry nation in two decades.
The find helped propel Cairn Energy from a small company to a member of the FTSE index .SXEP of Britain's largest firms.
Cairn India, which listed in 2007, is developing three oil fields -- Mangala, Bhagyam and Aishwariya -- in the desert state of Rajasthan.
Production at the Mangala field is ramping up to the target plateau rate of 125,000 barrels of oil per day (bopd). Bhagyam has the potential to produce 40,000 bopd and Aishwariya another 10,000 bopd.
The company has said the oil field in Rajasthan has the potential to pump 240,000 barrels per day -- around a quarter of India's output.
OPEN OFFER PRICE BEING RAISED
Vedanta has offered 405 rupees a share to buy between 40 and 51 percent of Cairn India from Cairn Energy.
The final stake bought from Cairn Energy would depend on the response to an open offer for a 20 percent stake made to minority shareholders at 355 rupees a share. The open offer opens on October 11.
Under terms of the deal, Cairn Energy would be paid the extra 50 rupees a share for not competing with Vedanta in India.
Analysts say the open offer price to minority shareholders is lower than expectations. Vedanta could raise the price and assuage concerns they are being undercut by the deal.
Life Insurance Corp of India, which holds a 2.6 percent stake in Cairn India, may not tender its shares unless it gets what the UK parent is offered, the Mint newspaper reported last week.
VEDANTA WALKING AWAY FROM THE DEAL
Even though some analysts have questioned the reasoning behind a miner seeking to foray into oil exploration, Vedanta Chairman Anil Agarwal is unlikely to walk away from the deal.
Agarwal has experience in working with the government and has navigated choppy regulatory waters to buy stakes in Bharat Aluminum Co and Hindustan Zinc (HZNC.BO).
A deal with Cairn would give Vedanta a slice of India's oil reserves and exposure to surging demand. Vedanta expects Cairn India to produce around 200,000 bopd by early 2012.
Vedanta acquired the zinc assets of Anglo American (AAL.L) in May, making it the world's largest integrated zinc and lead producer. Cairn India's main asset, with an estimated 6.5 billion barrels of oil and gas, in Rajasthan is near Vedanta's zinc operations.
BHP Billiton (BHP.AX) (BLT.L) is the only large mining company to have a significant interest in oil.
(Editing by Ranjit Gangadharan and Muralikumar Anantharaman)