Corporate Governance Alert – Vedanta Restructuring

 

Download the full report: Vedanta Restructuring – InGovern CG Alert

 

We attended the conference call held by management of the Vedanta Group.

 

 

Sesa Goa

Sterlite Industries

Market Price/share

Rs. 226.70

Rs. 118.60

Market Cap.

Rs. 19,702 cr

Rs. 39,864 cr

Total Issued Shares

86.91 cr

336.12 cr

Free Float

44.87%

41.76%

52-week high price

Rs. 330.80

Rs. 190.00

52-week low price

Rs. 148.30

Rs. 86.15

Face value/ share

Re. 1

Re. 1

(As on February 24, 2012; cr: crores)

 

Our Views

  • Acquisition debt of US$ 5.9 billion transferred from Vedanta PLC to Sesa Sterlite.
  • Risks associated with Vedanta Aluminium transferred from shareholders of Vedanta PLC to shareholders of Sterlite and Sesa Goa. This risk transfer may not be adequately compensated.
  • Vedanta Aluminium has issues of alleged human rights violations, environmental concerns, etc. which are now transferred directly to Sesa Sterlite and its shareholders. Vedanta has been criticised by human rights and activist groups, including Survival International and Amnesty International.

 

Sesa Goa – Leading Institutional Shareholders

Sl.

Name of Shareholders (as on Dec 31, 2011)

% shareholding

1.

Franklin Templeton Investment Trust Plc

9.79

2.

Templeton Emerging Markets Investment Trust Plc

2.42

Total

12.2

 

Sterlite Industries – Leading Institutional Shareholders

Sl.

Name of Shareholders (as on Dec 31, 2011)

% shareholding

1.

Citibank NA New York NYADR Department

12.75

2.

Life Insurance Corporation of India

2.60

3.

ICICI Prudential Life Insurance Company Limited

2.17

4.

Bhadram Janhit Shalika

2.11

Total

19.64

 

Transaction Highlights

The Vedanta restructuring is a complex transaction that was announced Saturday, Feb 25th morning. The highlights of the transaction:

a)      Sterlite Industries will merge with Sesa Goa to form Sesa Sterlite. Shareholders of Sterlite Industries will get 3 shares of Sesa for every 5 shares held.

b)      Vedanta will transfer its 38.8% shareholding in Cairn to Sesa Sterlite for consideration of $ 1 and $5.9 billion of debt.

c)      Vedanta will transfer its 70.5% shareholding in Vedanta Aluminium to Sesa for new 72m shares of Sesa. Sterlite owns the remaining 29.5% of Vedanta Aluminium and this would result in Sesa Sterlite owning 100% of Vedanta Aluminium.

Vedanta will transfer its 94.8% shareholding in MALCO (whose principal assets are its 3.6% shareholding in Sterlite Industries) to Sesa for new shares of Sesa.

 

InGovern Analysis

a)      The transfer of Cairn stake to Sesa is taking place at cost with no profits to Vedanta. 38.5% of Cairn was acquired by Vedanta for $5.79 billion last year.

b)      Sesa will issue 72m shares to shareholders of Vedanta Aluminium (VAL), the equity valuation of VAL is Rs.2332 crore. At this, Vedanta Aluminium has enterprise value of approximately $6 billion with zero EBITDA. Management commented that they have been conservative in valuing VAL as they have not considered operations of captive bauxite mines for the next 3 years. Management also commented that the replacement value of VAL assets are higher than $6 billion.

c)      Sesa will issue 79m shares to shareholders of MALCO, and 100% of equity of MALCO is valued at Rs.1793 crore. This is at a 24% premium to the valuation of its principal assets – its 3.6% shareholding of Sterlite – the value of which comes to Rs.1435 crore.

d)     Given Friday closing prices of Sesa at Rs.227 and Sterlite at Rs.119, the swap ratio (of 3 shares of Sesa for 5 of Sterlite) seems to be tilted in favour of Sterlite shareholders.

e)      The entire transaction gives a cleaner structure with a well diversified portfolio of minerals and mining assets.

f)       There would be a number of approvals needed, so as the company expects, the transaction could only get finalized only by end of 2012. However, it looks like none of the approvals are show stoppers and things should fall in place.

g)      Acquisition debt of US$ 5.9 billion transferred from Vedanta PLC to Sesa Sterlite.

h)     Risks associated with Vedanta Aluminium transferred from shareholders of Vedanta PLC to shareholders of Sterlite and Sesa Goa. This risk transfer may not be adequately compensated for shareholders of Sterlite and Sesa Goa.