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Sesa Goa, Sterlite merger to cut Vedanta debt by 60%

3:5 share swap ratio for creating world?s seventh-largest diversified resources firm

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, the holding company of and , has decided to merge the two companies in a bid to cut debt and improve cash flows. The merger, to be executed through an all-share transaction, will give birth to , the world’s seventh-largest diversified resources company.

London-based Vedanta on Saturday said investors would get three Sesa Goa shares for every five shares of Sterlite. Vedanta would transfer its 38.8 per cent holding in , including a debt of $5.9 billion (around Rs 30,000 crore), to the new company that would hold 58.9 per cent of Cairn India. Sesa Goa already directly holds 20 per cent in Cairn India.

Vedanta’s debt would fall 61 per cent to $3.8 billion (around Rs 18,000 crore) and the debt-service liability would be reduced by $300 million (Rs 1,500 crore) for the year ending March 31, 2013, the company said in a presentation after announcing the merger.

The group expected cost savings of $200 million (Rs 1,000 crore) a year from the restructuring, vice-chairman told analysts in a conference call, adding the transaction was expected to be earnings-accretive in the first year itself.

Vedanta said, as a first step, it would merge non-ferrous metals producer Sterlite into sister concern and iron ore miner Sesa Goa. Its unlisted unit Vedanta Aluminium, along with Madras Aluminium Co, would then be transferred to the merged company.

The group’s holding in and , in which the government also holds part stake, would remain separate of the merger.

After the share transfer, Sesa Sterlite would be listed in India and also list American Depositary Shares in New York. The company expects the entire process to be completed in 2012 itself.

Vedanta, which will own 58.3 per cent in Sesa Sterlite after restructuring, now controls about 55 per cent each in Sterlite Industries and Sesa Goa.

This is the group’s second effort to overhaul its structure. A similar exercise in 2008 was aborted due to investors’ opposition of the plan and the global economic slowdown.

Today, Vedanta sought to reassure its minority shareholders by saying the restructuring would be earnings-accretive in the first year itself. Vedanta had a total debt of $9 billion (Rs 45,000 crore) as of December and serviced interest payments of about $500 million (Rs 2,500 crore), but, with the transfer of most of its debt to Sesa Sterlite, the annual debt servicing for the parent would come down to $180 million (Rs 900 crore), Agarwal said.(Click here for chart)

Cairn India, in which Vedanta acquired a majority stake late last year in an $8.7-billion deal, would remain separately listed, given the different valuation dynamics for oil and gas companies, its Managing Director Rahul Dhir said in the conference call.

The cash-rich company was likely to decide on a dividend and a one-time payout for shareholders within the next two to three months, he said. Navin Agarwal said: “The new structure removes all cross holdings and creates a very simplified structure.”

The company said the move would reduce volatility of earnings and give investors an exposure to all businesses of the company across commodities. Savings of Rs 1,000 crore a year are expected from the move. “This will help Vedanta improve its debt profile as the loans taken to buy Cairn will be transferred to Sesa Sterlite,” said , an analyst at Centrum Broking “This will be a positive since Cairn has a good cash flow,” he added.

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