Sale of Cairn unit to be test case for India

Sir Bill Gammell, chairman of oil explorer Cairn Energy, is founding patron of a sports charity whose mantra is “winning isn’t everything, but wanting to win is”.

Sir Bill, a former international rugby player, is about to discover how far the will to win can go in India. He is awaiting New Delhi’s sanction for UK-based Cairn’s sale of a $9.6bn controlling stake in its Indian subsidiary to Vedanta, the India-focused mining company.

Anil Agarwal, Vedanta’s billionaire founder, certainly does not lack drive. Over the past 15 years, he has transformed a small family metal fabrication business into a global mining group, mainly by snapping up underperforming state-owned Indian mining firms and strengthening their operations. Now he is launching into oil and gas production.

But Vedanta’s recent regulatory setbacks have raised questions about the UK-listed company’s prospects for extending its control over India’s mineral wealth.

They have cast a shadow over its planned acquisition of Cairn India, with its strategically important oilfields in a country renowned for an energy deficit.

Sir Bill is betting that the high-profile sale of what his executives describe as a world-class asset in the western state of Rajasthan will not get tripped up by the regulators or those that seek to influence them in a sometimes ferociously competitive corporate environment.

In an interview this week, he and Mr Agarwal expressed optimism that New Delhi would approve the sale in a few months.

He said: “I’m completely confident that this transaction will go ahead. It’s really a question of all the stakeholders becoming comfortable ... I think it’s a good deal for both sides.”

But in a country enthralled by the “decision-making process”, protracted delays could test the ties between the two entrepreneurs, as Sir Bill seeks cash for his promising, but costly, Greenland explorations, and Cairn India requires an additional $2bn investment over the next three to four years to double its current production to 240,000 barrels a day.

“If you get stuck, it’s more critical,” Sir Bill says. “It’s important that the business doesn’t get affected by the change in corporate ownership.”

The deal that caught both London investors and the Indian government off guard in August had its inception just weeks earlier, as Mr Agarwal, who was on holiday in Scotland, dropped by to meet Sir Bill for tea and stunned him with an unsolicited offer to buy Cairn India.

In spite of their shared entrepreneurial energies, the two had not previously met. But with two common members on their respective corporate boards, Mr Agarwal was familiar with Sir Bill’s rich Indian oil finds – and had a long-standing aspiration to plunge into the oil business.

“Adding oil is a feather in our cap,” Mr Agarwal says. “Ever since I was young, I was hearing how India needed more and more oil.”

Cairn India, which held an IPO on the Bombay Stock Exchange in 2007 at Rs155 per share, was not technically on the market.

But Sir Bill was considering a sell-off of the maturing Indian business within 18 months to support Cairn’s focus on exploration elsewhere. The Scottish oil explorer found Mr Agarwal’s offer price of Rs355 per share, plus a Rs50 per share “non-compete” premium for Cairn Energy, too good to refuse.

“Cairn didn’t particularly have a plan that we were going to divest at this point in time, but we were offered an attractive price,” Sir Bill says. “Our drivers are: can we double the value every three years?”

So speedy were the negotiations that the Indian government and Cairn’s production partner, state-owned ONGC, were “wrong-footed” by the unexpected deal to sell to Vedanta – a company that has been sparring with New Delhi on issues ranging from bauxite mining in Orissa to its desire to buy out the state’s minority shareholding in two Vedanta-controlled mining companies. “Our partners were upset they hadn’t had prior warning and that caused us some embarrassment,” Sir Bill says. “I have apologised for that.”

Some powerful figures among India’s business community say that the Scottish entrepreneur may have to pay more obeisance to state power brokers, and that Mr Agarwal will likewise have to “grease the wheels” to make the transaction more attractive to the Ministry of Petroleum and the regulators.

Others say the deal is likely to go through on schedule and agree with Sir Bill’s view that the sale of Cairn Energy is an important “test case” for India’s standing as a destination for foreign direct investment and the country’s capital markets.

Meanwhile, India’s media are rife with speculation that powerful Indian business interests are keen to obstruct the acquisition of the highly lucrative oil assets by a man they see as an upstart and unwelcome rival. But Mr Agarwal believes India’s elite business circle is like “a crowded train compartment. Everyone says, ‘there’s no room, there’s no room’, but eventually people make room and soon they are talking and sharing lunch.”