The London-listed Vedanta Resources is giving final touches to a merger of Sesa Goa with Sterlite Industries, creating a Rs 40,000-crore metals giant. As part of the grand restructuring initiated by Anil Agarwal, even Cairn India may get realigned with the new entity.
Sesa Goa has a current market capitalisation of around Rs 21,441 crore and Sterlite Rs 43,158 crore.
Till December 2011, the promoters owned 53.3 per cent of Sterlite and 55.1 per cent in Sesa Goa, held through various investment and finance companies of Vedanta. Sterlite, in turn, owns 64.9 per cent in Hindustan Zinc Ltd (HZL).
According to independent sources aware of the ongoing plan, a share swap in the ratio of 2:3 is being talked about. This means a shareholder will get two shares of Sterlite Industries for every three shares of Sesa Goa. But, this could not be verified.
|KEY FINANCIALS (Rs crore)|
|Sesa Goa*||Sterlite **||Cairn India|
|Cash profit (FY11)||3,563||1,504||6,941|
All figures in Rs crore, except where stated otherwise
*Sesa Goa has 20% stake in Cairn India, 100% in V S Dempo
** Sterlite has four subsidiaries: Balco (51%), Hindustan Zinc (64.9%), Sterlite Energy (100%) and Australian Copper Mines (100%)
Source: Vedanta Annual Report, CapitaLine and
National Stock Exchange
Analysts say the merger could be the first step in resuming the group restructuring started and then halted in 2008 due to an investor backlash. Under that plan, Sterlite would have held the copper and zinc businesses and Vedanta Aluminium was supposed to hold the aluminium and energy businesses. Sesa Goa, or the iron ore business, was still under direct control of Vedanta Resources.
A source in the know of the development added, “Vedanta Aluminium Ltd (VAL) may now also come under Sterlite Industries.” Currently, VAL is a private company where the promoters own over 70.5 per cent.
The official said under the new structure, Sterlite would hold all the metals businesses — aluminium, copper, zinc and iron ore — of Vedanta in India. Even Sesa’s iron ore operations will come under it.
Another analyst added, “Already, HZL is part of Sterlite. Therefore, with this move, Sesa Goa, too, will get out of the direct hold of Vedanta and come under Sterlite.”
But, it may not just stop there. Sources added Sterlite may well become the holding company for the entire Indian operations. That means even Sesa Goa and Vedanta’s investments in Cairn India are getting realigned.
A source said, “The design is to transfer the debt of a non-operating holding company (Vedanta Plc) to a cash flow-generating entity with underlying Indian assets. Now, Sterlite can become the robust Indian holding company, with India operations. Now, people can not point fingers at a UK entity Vedanta owning a large chunk of a strategic oil asset in India. So, from a strategic, geopolitical and financial angle, this makes logical sense.”
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.
When contacted, the group spokesperson said: “Vedanta's stated strategy is to simplify and consolidate its corporate structure. Management reviews options to deliver this strategy on an ongoing basis and will update the market as appropriate.”
P K Mukherjee, MD, Sesa Goa, said, “Any merger story kicks off through board meetings and then follows the prescribed process. Therefore, before any such proposal is approved by the boards, such stories create speculative deals in the market.”
Tarun Jain, Group CFO, also did not want to comment. 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 (Rs 2,750-crore) obligation this year to service just the interest component of its debt.
With over $9 billion (Rs 45,000 crore) of debt, Vedanta’s debt covenants are also restrictive. Analysts predict the covenants can get triggered if the commodity prices fall 15-20 per cent from current levels. In any case, the prospects of rerating always loom large.
Vedanta has also made it clear, in recent analyst calls, its talks with the government for the residual Balco stake have been revived. That could potentially mean another $3-billion (Rs 15,000-crore) payout. It also has its own capex lined up, making many worry its debt may actually balloon to an unsustainable level. After the Cairn acquisition. Moody’s has already downgraded Vedanta’s bonds to Ba3 from Ba2 last month.