OREANDA-NEWS. September 5, 2011. State-owned Oil and Natural Gas Corp (ONGC) is unlikely to exercise its preemption rights to acquire Cairn India as it finds the reduced price of Rs 355 a share that Vedanta Resources is paying for the company still too high.

ONGC had appointed SBI Caps to do an independent valuation of Cairn India and a few weeks back, it got the draft valuation report, sources privy to the development said.

The report outlines Cairn India's valuation under different scenarios of production and crude oil prices. ONGC, they said, has interpreted the valuation report to conclude that Cairn India is worth much less than the Rs 355 a share price that London-listed mining group Vedanta is paying.

This is despite the fact that UK's Cairn Energy, which is selling most of its 52.11 per cent stake in its Indian unit to Vedanta, has agreed to share royalty and pay oil cess on the company's lucrative Rajasthan block, making Cairn India an attractive acquisition target for the state explorer.

Cairn agreeing to make the royalty that the state-owned firm pays on its 30 per cent share as well as Cairn India's 70 per cent share of production from the Rajasthan field cost-recoverable will help ONGC get back two-thirds of the payout it shouldered on its partner's behalf earlier, which had made the Rajasthan fields a losing proposition for it.

Also, Cairn has agreed to absolve ONGC from the payment of a Rs 2,500 per tonne cess on its 70 per cent share of production from the Rajasthan block, which will add to ONGC's profitability.

Sources said despite these two positives and also Vedanta lowering the acquisition price from Rs 405 per share when the USD 9.6 billion deal was announced in August last year to Rs 355 apiece, ONGC does not find Cairn India attractive enough to acquire.

ONGC, they said, is likely to take the SBI Caps report and its interpretation of it to the company board on September 27. Once the board - which also includes officials of the Oil Ministry that are now eager to see the Cairn-Vedanta deal conclude soon - decides to let the preemption right lapse, ONGC will formally give a no-objection to the deal.

ONGC, which holds a stake in eight out of the 10 oil and gas properties Cairn India has in the country, holds preemption, or the right of first refusal, over its partner's participating interest in the fields.

Sources said Cairn Energy has already informed ONGC that it is accepting the government conditions on royalty and cess and will make its Indian unit agree to it through a shareholders' vote by September 14. Thereafter, it will formally write to ONGC for a no-objection certificate.