There has been much discussion on Vedanta's deals in India. First it was cairn; now it's Seas Goa. We tried to make sense of what is going on between the sterlite industries (by Vedanta group) and Seas Goa.

Analysis of Vedanta’s Restructuring Plan

The Facts

• Vedanta Resources, Which is listed in London Stock Exchange, would merge the two of its Indian subsidiaries; Sesa Goa and Sterlite Industries into a single entity named Sesa Sterlite.
• The new Entity would be world’s seventh largest Integrated Mining Company.
• The merger of Sterlite Industries into Sesa Goa would be done by a share swap ratio of 5:3 i.e. Sterlite shareholders are expected to receive 3 Sesa Goa shares for every 5 existing Sterlite shares.
• Consolidation of Vedanta Aluminium (VAL), via the merger of Ekaterina Ltd (a Mauritius holding company for Vedanta's 70.5% shareholding in VAL) into Sesa Sterlite and the issue of 72.3 million Sesa Goa shares to Vedanta after obtaining all necessary approvals.
• Merger of Madras Aluminium (MALCO) into Sesa Sterlite, through the issue of 78.7 million Sesa Goa shares to shareholders of MALCO as of the record date, to be determined after obtaining all necessary approvals. As part of the merger MALCO's existing shareholding in Sterlite will be cancelled by Sesa Sterlite.
• Post the merger of Sesa Goa and Sterlite, Sterlite Energy Limited and VAL's Aluminium business will be merged into the consolidated Sesa Sterlite. As wholly-owned subsidiaries no shares will be issued in consideration of the mergers.
• Vedanta will transfer its 38.8% direct shareholding in Cairn India to a wholly-owned subsidiary of Sesa Goa at a nominal consideration of $1, together with the associated acquisition debt of $5.9bn (through the transfer of companies in which such debt and shareholdings are held). The debt will continue to be guaranteed by Vedanta. This transfer is not inter-conditional on the merger of Sesa, Sterlite, MALCO and VAL.

On the face of it

The restructuring plan has been announced on 25^th February. The swap ratio of merger of Sterlite Industries into Sesa Goa favors the Sterlite shareholders. This is because five shares in Sterlite are worth Rs 593 at current market prices, while three shares in the Sesa Goa are valued at Rs 680.

Debt Concerns

Sesa and Sterlite have combined debt levels of Rs 20,000 crore. Including Cairn India, debt levels for the combined entity are likely to tip over the Rs 50,000 crore -mark. To service this will require a steady stream of cash.  

Because of the consolidation of Vedanta Aluminum (VAL) via the merger of Ekaterina Ltd into Sesa Sterlite, the shareholders of the new merged entity i.e. Sesa Sterlite will have to bear the entire debt of VAL which is approximately Rs. 4,100 cr and on the top of it VAL is pure loss making entity of the group.

The Major Bottleneck of the Deal

The minority shareholders in Sesa Goa and Sterlite—Franklin Resources (9.79%), Templeton Emerging Markets (2.44%) and Vanguard Group (1.46%)—have told the management of Vedanta Resources that they are uncomfortable with the transfer of the R48,500 crore of debt from Vedanta to the new merged company. This deal may not go through if these minority share holders are not on board with the management of Vedanta.

The Future out look

The consolidation and simplification of the Group structure is consistent with the Group's strategy. The elimination of cross holdings is expected to benefit the Group through superior capital structure, increased flexibility to allocate capital, broader access to capital markets and enhanced visibility of earnings and cashflow. The consolidation is expected to lead to significant operational, capital and corporate synergies, including economies of scale, leveraging technical expertise, more efficient movement of Group cash, improved allocation of capital and corporate cost savings including tax efficiencies. Increased diversification is expected to reduce volatility of earnings through commodity cycles, lowering the cost of capital and enhancing value in the long run.