Vedanta exits race to buy Iron Ore Company of Canada

With the rupee falling sharply against the dollar, corporate India is playing it safe. After Sun Pharmaceutical Industries, it’s now the turn of the Vedanta group to exit the race to buy assets abroad. Vedanta has withdrawn from the race to acquire Iron Ore Company of Canada, which would have cost it close to $4 billion (around Rs 24,100 crore).

Bankers say Vedanta has decided to stay out as the financial cost of the deal would have been too high at a time when the rupee had fallen to the 60-mark against the dollar, and it would have been difficult for the group to raise more loans to go for an expensive acquisition. The group has already transferred its $8.7 billion loan taken to acquire oil and gas producer Cairn India Ltd from its London-listed parent company to newly created Sesa Sterlite Ltd in India.

The company had made a bid for Iron Ore Company in March this year after global miner Rio Tinto, which controls the company, invited proposals from interested groups. An email sent to Vedanta did not elicit any response till the time of going to press.

<b>More cautious abroad</b>
Bankers say Indian companies are now becoming more cautious in foreign acquisitions, especially after a negative reaction from investors to Apollo Tyres’ $2.5-billion acquisition of Cooper Tires of the US. Investors in Apollo say they will reinvest in the scrip only after they see benefits of an acquisition flowing to the Indian company.

“There have been many instances in the past, be it Tata, Birla or Ambani, that their foreign acquisitions have failed to give any returns. Investors are not betting big on any investments via mergers and acquisitions route abroad,” said a banker who did not want to be named. “This is making other Indian groups think twice.”

Investors in Vedanta are also advising the company to exercise caution. A JP Morgan report says what is worrying investors is the Indian currency’s fall would hit the debt and net worth of the proposed merged entity, Sesa Sterlite, because almost $8 billion of its debt is dollar-based. However, the translation loss is unlikely on the entire amount, given a part of the debt is for capital spend.

“A large part of any hit on the rupee fall would likely go through the reserves and not the profit and loss, as a majority of the dollar debt is in a subsidiary. A large part of the earnings excluding power is essentially leveraged to the dollar, and a weakening rupee is positive for reported earnings and cash flows,” the report dated June 18 said. “The key concern for Sesa Sterlite will be the huge debt of $13.5 billion whereas the cash flow visibility remains low,” says JP Morgan. Against this backdrop, bankers say it will be difficult for Vedanta to make a bid for the Canadian ore company. The group, analysts say, is in a consolidate mode instead of going on an aggressive takeover drive.