Print | Share | Reprint

Vedanta reshuffle creates corporate rubbish bin

by Paul Whitfield | Published February 27, 2012 at 2:48 PM

The scorecard of share prices tells the story of the losers, the bigger losers and the inherent risks in Vedanta Resources plc's asset reshuffle. The deal, announced over the weekend, will merge Vedanta's listed subsidiaries, Sesa Goa Ltd. and Sterlite Industries (India) Ltd., before lumbering them with Vedanta's heavily indebted oil assets and its unprofitable aluminum business.

Sesa Goa's minority shareholders are the main losers. Shares in India's biggest iron ore exporter, which is 55.7% owned by Indian conglomerate Vedanta, closed down just over 10% on the Bombay market on Monday, Feb. 27. That reflected analyst comments that the deal ratio of three Sesa Goa shares for five Sterlite shares favored the latter. The deal was pitched at a 15% premium to Sterlite shares, based on the two companies' Friday closing price.

That should have been good news for Sterlite's minority shareholders, but it wasn't enough to save their stock from its own fall of 2.9% on Monday. Sterlite is 54.6% owned by Vedanta.

Yes, there is $200 million of synergies that should come from simplifying Vedanta's dizzyingly complex subsidiary operations. But the real reason Sesa Goa and Sterlite are being merged is to create a corporate rubbish bin. Sesa Sterlite, as the new company will be known, will have a market capitalization of about $20 billion, making it big enough to house Vedanta's unwanted assets.

Into that sizable bin goes the recently acquired 38.8% stake in Indian oil company Cairn India Ltd., and, more importantly, the $5.9 billion of Vedanta debt linked to the stake.

In, too, goes Vedanta's 70% stake in Vedanta Aluminum, a money-losing operation that has about $4 billion of debt. VAL, as it is called, is also high risk. Its success depends on it opening mines near its operations in the eastern Indian state of Orissa. Indian courts have so far blocked that ambition, leaving it running at 30% capacity. Despite that, and with the aid of some optimistic production forecasts, it has been given a generous $6 billion enterprise value in the deal, according to analysts at Credit Suisse Group.

Debt had threatened to cripple Vedanta. Sesa Sterlite will begin life with a net debt of between $7.5 billion and $7.9 billion, and a manageable net-debt-to-equity ratio of about 1.5 times, according to a note published by Liberum Capital Ltd.'s Ash Lazenby.

London-listed Vedanta, which is about 60% owned by its directors, led by chairman Anil Agarwal, is clearly the big winner in the transaction. Its shares should have leaped, yet they didn't. Vedanta stock started the day marginally higher, slumped into the red early afternoon, before closing marginally higher at 1,511 pence ($23.97).

The reason for that muted response? Wariness. There remains a real risk that minority shareholders at Sesa, in particular, and Sterlite might yet band together to reject the merger. Vedanta has been here before. It dropped a restructuring plan in 2008 when Sterlite's minority shareholders rebelled after their stock dropped 22%.

The merger of Sesa and Sterlite, and the subsequent injection of the aluminum assets, needs the support of at least 75% of shareholders by value, and a majority of those voting at each of the companies. Agarwal will have to carry at least some of Sesa's minority shareholders with him if this is to be a case of second time lucky.

Share:

Restructuring

Vedanta reshuffle creates corporate rubbish bin

Free preview

Meet the journalists

Paul Whitfield

Correspondent: Paris

Movers & Shakers

Video

Coming back for more

Sectors