Vedanta resources, the Indian mining company, is set to move into the oil business within the next few days if it can finalise a deal for a majority stake in Cairn India.
The deal with Edinburgh-based Cairn Energy, which has a 62 per cent stake in the Indian subsidiary, could be announced as early as this morning. The two groups yesterday confirmed widely rumoured talks, cautioning that discussions were still at a preliminary stage. However, it is understood that the framework of a deal has been agreed and that the two groups are putting the last touches to the transaction.
Vedanta, the world's biggest zinc producer, is eager to develop into a fully blown resources group, and encourages the moniker, "the Indian BHP Billiton", referring to the Anglo-Australian giant that has interests in numerous commodities. The FTSE 100 group will have to pay more than £4bn for the stake. Cairn India, the fourth-largest oil and gas company in the country, was valued at $13.6bn (£8.75bn) at the close of trading in Mumbai on Wednesday, valuing Cairn Energy's stake at about $8.5bn (£5.5bn). Cairn India has sold off minority stakes in the past, but it is understood that Vedanta will take at least a 51 per cent stake in the group, if a deal is agreed.
A huge onshore oil find in the Rajasthan region helped to propel Cairn Energy, which is still chiefly an exploration group, from a small company to a major oil producer.
"It's a very good business and the main asset in Rajasthan is of a scale that would be of interest to even the bigger companies out there," said Richard Slape from Canaccord Genuity. "I would have thought that anybody wanting to purchase Cairn Energy's stake would want control of Cairn India, which would certainly mean they'd have to sell the majority of their interest, if not all of it."
Others argued that Cairn would be better off selling only a minority stake, saying that a large sale would make sense only if Cairn needed money to fund major exploration of its assets in Greenland. "I'd be slightly surprised if the deal was as big as 51 per cent, unless Cairn has an announcement to make on its assets in Greenland," said Sanjeev Bahl at Numis. "Cairn has been very bullish on the outlook for India." Sources close to Vedanta stressed that it wanted to become a major oil producer. The two groups have discussed a number of options, including an equity stake, asset purchases or a complete takeover, although buying a majority stake remains Vedanta's preferred move.
However, news that Cairn Energy is willing to sell a majority stake is likely to pique the interest of other major oil groups, and sources yesterday refused to rule out the possibility of an auction. Vedanta would fund any deal with a mixture of cash and debt. In May, it said that net income almost tripled to $602.3m (£390m) in the 12 months to the end of March, and two years ago it committed to spend $20bn (£13bn) on expansion plans. JP Morgan Cazenove is understood to be advising on the takeover deal.
Cairn Energy's shares increased by 1.8 per cent on news of the talks. Vedanta's shares fell 7.47 per cent as analysts said the group's balance sheet was already "relatively stretched".