Vedanta group companies in India have been restructured. Belying earlier analysts expectations of Sterlite absorbing Sesa Goa (See: Sterlite Industries to be merged with Sesa Goa to reduce Vedanta debt), Sesa Goa, would absorb Sterlite in an all-share transaction, according to London-based Vedanta's statement. Investors would receive three Sesa Goa shares for five shares of Sterlite.
- The first key takeaway of the announcement is that of the merger of Sterlite into Sesa Goa, with the proposed new company with the name ''Sesa Sterlite''. The swap ratio indicated is 3 Sesa Goa shares to be issued for every 5 existing Sterlite shares.
- Prima facie, this merger ratio appears to be slightly in favour of Sterlite shareholders. And it appears that the merger ratio is slightly detrimental to the Sesa Goa shareholders.
- The second key takeaway of the announcement is that of: Vedanta Aluminium Ltd and The Madras Aluminium Company Ltd to be merged into Sesa Sterlite.
- Prima facie, this move of merging Vedanta Aluminium may cause concern amongst the shareholders. This is largely because of the large debt of the Vedanta Aluminium. With this move, Vedanta Plc will be a clear beneficiary as they can be able to pass-on Vedanta Aluminium to Sesa Sterlite.
- The third key takeaway of the announcement is that of: Vedanta's direct holding of 38.8 per cent in Cairn India Limited will be transferred to Sesa Goa, together with the associated debt of $5.9 billion, at cost. Post the transfer, Sesa Sterlite will have a 58.9 per cent shareholding in Cairn India.
- Prima facie, this move will surely benefit Sesa Sterlite as this brings in blue-chip asset of Cairn India into group. As Cairn India has proven oil reserves, with ability to generate significant cash flow, this can prove to be significant benefit for the shareholders of Sesa Sterlite.
- The apparent attempt of this restructuring is to reduce multiple corporate structures and crossholdings among companies. The group will find it easier to unlock value through a simplified structure. This exercise of restructuring must have been necessiated, especially after the large acquisition of Cairn India.
- Vedanta Group stocks have historically got lower valuations due to complicated corporate structure. With this restructuring effort, there is an increased probability that the group may get positive rerating by the market.
- This restructuring exercise will create a company "Sesa Sterlite", with revenues of Rs 66,431 crore ($14.2 billion) and EBITDA of INR 24,953 crore ($5.3 billion). Sesa Sterlite will be the world's seventh largest diversified natural resources company by EBITDA.
- Further, as the new corporate "Sesa Sterlite" is expected to have market cap upwards of $20 billion (that is about Rs 1,00,000 Crores), the group will have much larger profiling in the Indian corporate arena. This restructuring can also help the group in having better representative weightage in Nifty and Sensex as well.
- Further, status quo is maintained in the case of other group company "Hindustan Zinc". That may be largely because of the fact that about 29.54 per cent is owned by government of India. Hence, making Hindustan Zinc as part of group restructuring may be challenging.
- All in all, this is a progressive exercise by the Vedanta group, attempting an exercise of value unlocking from the group companies. This exercise shall help in streamlining the group interests in a positive manner. Further, the synergies of cost savings of Rs 1000 Crores per year can be compelling and can prove to be value accretive to all the associated companies.
- Welcome Sesa Sterlite, to the club of Rs 1,00,000 crore market cap.