Sesa Sterlite likely to merge Hindustan Zinc with itself

Company could use latter's cash and investments worth Rs 23,635 crore to pay debts, say bankers

Vedanta group, which is interested in buying the Indian government’s residual stake in Hindustan Zinc (HZL), is likely to merge the company with its India holding company, Sesa Sterlite, in the next financial year. The merger will give Sesa Sterlite, which already has a controlling stake in HZL, access to the latter’s cash and investments worth about Rs 23,635 crore, which it can use to pay off debts, say bankers.

Vedanta currently owns 55 per cent stake in Sesa Sterlite, which holds a 65 per cent stake in HZL. According to bankers, the group is currently debating the merger option internally and will take the final decision after the group buys the government stake.

Vedanta officials did not reply to emails seeking their views on the merger.

“Sesa would eventually want to de-list HZL and merge it with Sesa Sterlite thus improving the fungibility of cash flows. With a large minority shareholder with a board seat gone, the fungibility of HZL’s cash flows will improve Sesa Sterlite’s own balance sheet, which is stressed,” said a banker.

Bankers say it is important for Sesa Sterlite to clarify the Securities and Exchange Board of India’s (Sebi) takeover code, which mandates that any company in which the promoter’s shareholding goes above 75 per cent, it must sell down to 75 per cent or go for a de-listing. Bankers say if Sesa Sterlite pays more than Rs 175 a share for HZL in the auction by the Indian government, then it will have a negative impact on Sesa Sterlite. However, this does not include the strategic upside from greater fungibility of cash – a reason the firm may even pay a higher price. Bankers say Sesa Sterlite may pay a 15 per cent premium to HZL’s prevailing share price of Rs 135 apiece.

Bankers point out that the tide is turning for Sesa Sterlite with its net debt expected to fall in the coming quarters due to strong cash flows from Cairn and HZL. With the regulatory issues over Karnataka mining now getting sorted out, it will add to Sesa Sterlite's turnaround. “Overall, we expect consolidated earnings before depreciation, tax and interest of close to $1.2-1.4 billion on a quarterly basis with volumes in oil and zinc subsidiaries,” said an analyst with a leading foreign bank. Sterlite’s shares are up 44 per cent in the past six months to Rs 210 on Wednesday.

Following a complex restructuring last year, Vedanta had brought all Indian companies under the Sesa Sterlite umbrella including Cairn India, which is now buying back shares from shareholders. Sesa Sterlite had also taken over the debt, which was taken by Vedanta for the acquisition of oil refiner Cairn India in December 2011 for $8.67 billion. Sesa Sterlite has a debt of $5.1 billion on its balance sheet for Cairn acquisition after two international subsidiaries of Vedanta returned $900 million of loans to Sesa.