Vedanta Demerger: Potential for Value Creation but Uncertainty Remains

The Vedanta group has spent the past decade simplifying its structure and consolidating it into one listed entity. The group has brought all its businesses in India, from metals to crude, under one umbrella, Vedanta.

But now, after all that effort, Anil Agarwal, the mining billionaire who built an empire spanning metals and mining over half a century, plans to separate his single massive unit into different entities.

The company's board has approved a massive demerger, splitting the existing company into six separate entities.

So, Vedanta Ltd will demerge into Vedanta Aluminium, Vedanta Oil & Gas, Vedanta Power, Vedanta Steel and Ferrous Materials, and Vedanta Base Metals.

Every new entity will house key sub-segments, such as aluminium, oil & gas, power, steel & ferrous, base metals, Hindustan Zinc, and new segments. At present, Vedanta Ltd and Hindustan Zinc are the only listed entities.

Under the demerger agreement, the existing shareholders of Vedanta will receive one share of each of the five new companies for every share of Vedanta Limited held.

The process is expected to conclude by fiscal 2025, subject to further approvals.

The idea behind this massive split is to enable each key business to pursue its own strategic initiatives.

The company believes this will simplify the group's structure, allowing direct access for investors to invest in pure plays. It expects to generate more value over the long-term, through multiple expansions of the pure-play entities.

Additionally, there is a good chance the new structure can help the company to pare down its astronomical debt.

Vedanta has a total debt of Rs 434 bn as of financial year 2023. This burgeoning debt has led to an uncomfortable debt to equity ratio of 1.1x and a subpar interest coverage ratio of 4.3x.

But how can these new entities help repay the debt?

These newly minted better-focused entities are likely to attract more and perhaps long-term investors. They can provide opportunities to global investors, including sovereign wealth funds, retail investors and strategic investors, with direct investment opportunities in dedicated pure-play companies linked to India's remarkable growth.

All of which will enable Vedanta to sell a stake in any operational entity, helping it deleverage the balance sheet.

While there can be scope for value creation, the company hasn't disclosed vital information.

One such detail is the apportioning of the astronomical debt sitting on the company's books. The other one is the valuations assigned to the individual companies.

The absence of detailed information regarding these matters for all six entities introduces significant uncertainty regarding the potential for value creation.

And that is not all.

Vedanta has previously contemplated a similar demerger back in November 2021 but ultimately opted against it. Therefore, despite the potential for future value creation, there are looming uncertainties.

The lack of clarity on debt profiles, reversal of past consolidation efforts, and a lack of focus on core operations, are all major causes for concern.

Conclusion

Well-planned demergers hold the promise of unlocking shareholder value. It allows different business segments to operate independently and access their own growth opportunities.

Nevertheless, not all demergers achieve success. Their outcomes depend on various factors, including the competence of the management team and the underlying fundamentals of the demerged entities.

For instance, the demerger of Aditya Birla's cement business and L&T's information technology business created long-term value for shareholders. But the Aarti Industries demerger failed to do so.

Therefore, it's imperative to conduct thorough research before investing in companies that are planning demergers.

Analysing the demerger scheme, the management's intentions, and past interactions with minority shareholders, can provide valuable insights to make informed investment decisions.

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