Sterlite, Sesa Goa boards meet today to start merger process
Anil Agarwal’s London-listed Vedanta Resources Group is planning to create a new diversified resources giant by merging Sterlite, Sesa Goa, Vedanta Aluminium and even its 60 per cent holding in Cairn India into one umbrella holding company.
This new holding company will cover the entire resources spectrum — oil, iron ore, aluminium, copper, zinc and lead — and will mirror Vedanta Plc, virtually creating a dual listing structure. It will also simplify a complex ownership and corporate structure and infuse much-needed cash for the group’s expansion plans.
Till December 2011, Vedanta and other promoter group financial and investment vehicles owned 55 per cent of Sesa Goa and 53 per cent in Sterlite. Sterlite in turn owned 64.9 per cent in Hindustan Zinc.
Sources in the know say the massive new resources giant will have close to Rs 78,496 crore ($16 billion) of revenue, Rs 12,265 crore ($2.5 billion) of profit after tax and over Rs 98,120 crore ($20 billion) of market capitalisation. Though the eventual share swaps are still not clear, sources say Sterlite’s shareholders will own close to 50 per cent in the new company while the investors of Sesa Goa and Cairn will own 20 and 30 per cent, respectively. The first steps towards creating this massive overhaul in the group is set to begin on Saturday when the boards of Sterlite and Sesa Goa will meet to consider the broad contours, including a merger between them.
To begin, Sterlite Industries is likely to get merged with Sesa Goa, contrary to the popular perception of the reverse, according to the sources. Even though it could not be independently verified, these sources said for every share of the combined entity, shareholders would get two or 2.5 shares of Sterlite.
This is being done to enhance the dividend payout capacity of Sesa Goa, which is the cash-generating entity for Anil Agarwal.
When contacted, a Vedanta Group spokesperson told Business Standard, “I cannot comment on this. It is up to the boards to decide.”
The merged Sesa-Sterlite combo will be a metals and mining and natural resources giant with the third biggest profit in India Inc after ONGC and Reliance Industries. Their combined profits as of FY10-11 stood at Rs 11,545 crore. Its combined market cap at Rs 59,639 crore, based on Friday’s closing, will also be more than double its rival Hindalco’s market cap of Rs 28,286 crore.
“It is not difficult to see the rationale for this restructuring. Investors have been looking for a simpler structure, while Vedanta has been grappling with the mismatch of cash flows among its various businesses. This means Vedanta is likely looking to merge everything into one holding company, almost mirroring Vedanta Plc, except for perhaps Konkola Copper Mines (where it has a minority partner),” wrote Rakesh Arora and Samidha Gehlot of Macquarie in their February 21 analyst report, explaining the rationale behind the massive restructuring initiative. KPMG is said to be advising the group on the restructuring exercise.
As a consequence of this mega restructuring, Sesa Goa and Vedanta’s investments in Cairn India will also get realigned. Currently, Vedanta Resources Plc has 38.8 per cent in Cairn India. Sesa Goa has around 20 per cent. After the Sterlite-Sesa Goa merger, Vedanta’s stake in Cairn will also get transferred into this new entity.
The businesses under Hindustan Zinc and BALCO may also remain out of the restructuring as Anil Agarwal is yet to buy back the stakes the Indian government still holds in them.
Vedanta Aluminium Ltd (VAL) is believed to be a key catalyst behind the restructuring exercise. Vedanta Plc, whose balance sheet has been under stress after the Cairn India acquisition, has been looking to offload its 70.5 per cent equity in VAL. “The question is who would fund this? Management has maintained that Sterlite will continue to hold only 30 per cent. Since we are assuming everything will get merged into a new entity, it means the VAL burden can’t be loaded on to Sterlite alone; in the worst case, it will be distributed across the merged entity,” said the Macquarie report.
As a consequence of this mega restructuring, Sesa Goa and Vedanta’s investments in Cairn India will also get realigned. Currently, Vedanta Resources Plc has 38.8 per cent in Cairn India. Sesa Goa has around 20 per cent. Once Sesa Goa and Sterlite merge, Sesa’s investment will get transferred into Sterlite. And with Vedanta transferring its stake, Sterlite will own 58.8 per cent in Cairn India.
The restructuring will also keep in mind Vedanta’s debt repayment obligations, especially after the Cairn India acquisition. The subsidiaries also need to capitalise it regularly through dividend payouts. Vedanta has a $550 million obligation this year to service just the interest component of its debt.
With over $9 billion of pro forma debt, Vedanta’s debt covenants are also restrictive. Vedanta has also made it clear, in recent analyst calls, that its talks with the government for the residual BALCO stake have been revived. That could potentially mean another $3-billion payout. It also has its own capex lined up, making many worry its debt may actually balloon to an unsustainable level of $18-19 billion. After the Cairn acquisition. Moody’s has already downgraded Vendanta’s bonds to Ba3 from Ba2 last month. Moody’s has also specified Vedanta has made sporadic attempts to reduce the debt concerns, but nothing major has happened.
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