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Sesa Sterlite merger: Will it benefit investors? - Views on News from Equitymaster
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  • Mar 6, 2012

    Sesa Sterlite merger: Will it benefit investors?

    The Vedanta group (Vedanta Resources Plc, listed on London Stock Exchange) has proposed a significant consolidation of its holding structure. As part of the group restructuring, Sterlite Industries is to merge into Sesa Goa to form Sesa Sterlite. The aim behind the restructuring, we believe, is to consolidate, remove complexity of the group structure and improve the overall ratios specifically with respect to debt servicing and better meeting covenants requirements at Vedanta level. The merged entity would be the largest metals and mining companies in India with interests in diversified metals like iron ore, copper, aluminium, zinc, power, and oil. It would also pole-vault itself to the rank of being the seventh in the pecking order of large resource conglomerates, thus approaching the likes of Vale and BHP Billiton in size.

    Key highlights of proposed restructuring process

    • Merger of Sterlite Industries into Sesa Goa in the ratio of 3:5, that is, 3 shares of Sesa Goa for 5 shares of Sterlite and the new entity would be named Sesa Sterlite.

    • Vedanta Aluminium Limited (VAL, 70.5% owned by Vedanta plc) and Madras Aluminium Company Limited (Malco, 94.8% owned by Vedanta plc) to be transferred to Sesa Sterlite. Sesa Goa to issue 72 m shares to Vedanta for its 70.5% interest in VAL. The merged entity would also assume Rs 197 bn of VAL's debt. Sesa Goa to issue 79 m shares to the shareholders of Malco, reflecting Malco's 3.6% ownership in Sterlite and its power assets.

    • Transfer of Vedanta plc's 38.8% stake in Cairn India to Sesa Goa together with associated debt of USD $5.9 bn. Post the transfer, Sesa Sterlite would have a 58.9% shareholding in Cairn India.

    • Sesa Sterlite would hold Sterlite's copper smelting business, 2400 MW power capacity at Sterlite Energy, VAL and current Sesa Goa operations directly and 58.9% stake in Cairn India, 64.9% stake in Hindustan Zinc, 100% stake in overseas zinc assets, 51% stake in Balco, Copper mines in Tasmania, Power capacity at Malco, VAL and Talwandi Sabo through the subsidiaries.
    Impact on shareholders' value

    The proposed restructuring would benefit only the shareholders of Vedanta Plc and would be negative for shareholders of Sesa Goa and Sterlite Industries. While there is no doubt that the restructuring would simplify the existing structure, the move has been necessitated to benefit the parent company, Vedanta Resources. The restructuring was necessary to prevent the parent company from breaching a debt covenant, which would have been triggered had commodity prices slipped further. By this move Vedanta Plc has not only pushed the dirt under Sesa Goa's rug, but is now ready to take some more debt from the market to buy out the Indian government's stake in Hindustan Zinc and also for its expansion plans. Sesa Goa will now have to service the high level of debts taken by the parent to acquire Cairn India as well as end up with incubating the loss-making Vedanta Aluminium.



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