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Mar-12
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Vedanta EGM
May-12
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Sep-12
CY 2012
Transaction completion
CY 2012
Restructuring exercise
The restructuring exercise includes merger of four companies viz Sterlite Industries, Sesa
Goa, Vedanta Alumina and MALCO and transfer of Vedantas stake in Cairn India to the
merged entity with an associated debt. The steps for the proposed transaction are:
1) Sterlite will merge into Sesa Goa to create Sesa Sterlite, through the issue of Sesa Goa
shares to shareholders of Sterlite. Sterlite shareholders as of the record date are expected
to receive 3 Sesa Goa shares for every 5 existing Sterlite shares. Sesa Goa also intends to
establish an ADS facility comparable to Sterlites current ADS. This would allow holders
of Sterlites ADS as of the record date to receive Sesa Goa ADS with appropriate
adjustments to reflect the foregoing exchange ratio. Each Sterlite ADS currently
represents four equity shares of Sterlite.
2) Consolidation of VAL, via the merger of Ekaterina Limited (a Mauritius holding
company for Vedantas 70.5% shareholding in VAL) into Sesa Sterlite and the issue of
72.3mn Sesa Goa shares to Vedanta after obtaining all necessary approvals. Based on
Sesa Goas closing price on 24 Feb 12 of Rs227/share, the equity value of VAL equates
to Rs23.32bn (US$473mn).
3) MALCO to merge into Sesa Sterlite, through the issue of 78.7mn Sesa Goa shares to
shareholders of MALCO as of the record date. Based on Sesa Goas closing price on on
24 Feb 12 of Rs227/share the value of MALCO equates to Rs17.9bn (US$363mn)
including the value of MALCOs existing 3.6% shareholding in Sterlite. As part of the
merger MALCOs existing shareholding in Sterlite will be cancelled by Sesa Sterlite.
4) Post the merger of Sesa Goa and Sterlite, Sterlite Energy Limited and VALs
Aluminium business will be merged into the consolidated Sesa Sterlite. As wholly-owned
subsidiaries no shares will be issued in consideration of the mergers.
5) Vedanta will transfer its 38.8% direct shareholding in Cairn India to a wholly-owned
subsidiary of Sesa Goa at a nominal consideration of US$1, together with the associated
acquisition debt of $5.9bn (coupon of 5.2%). The debt will continue to be guaranteed by
Vedanta. This transfer is not inter-conditional on the merger of Sesa, Sterlite, MALCO
and VAL.
Positives of the deal:
Consolidated balance sheet to be stronger and would reduce the cost of funds for
the companies.
Accumulated loss of Rs15bn at VAL would reduce the tax out flow for the group.
With the merger of SEL and VAL aluminium, the capex for VALs power plants
would reduce.
Shareholders of Cairn India and HZL would receive higher dividend over the next
two years as the merged entity has high debt repayment.
Positive for Sterlite shareholders in the near term as the deal is done at a premium
price of Rs119.
The valuation of VAL is on the higher side considering the company has been loss
making and we do not expect it to turn green over the next 1-2 years. Due to lack
of raw material integration, the cost of producing aluminium is quite high and this
would continue until any new resource is allocated to the company. The
management indicated that the valuation was done on a DCF basis on their
assumption that they would be allocated raw material resources over the next 2-3
years. In the process of the restructuring, Sterlites inter-corporate loan of Rs10bn
has not been mentioned.
The merger of VAL and SEL into Sesa-Sterlite would lead to SEL supplying
power to VALs expanded aluminium capacity. VAL is raising its aluminium
smelting capacity from 0.5mtpa to 1.25mtpa in the next one year. We believe
power required for this would be met by SEL and would restrict the upside from
its merchant power capacity.
Consolidated entity would have to refinance its debt transferred from Vedanta, as
its cash flow would be lower than the debt servicing required over the next two
years. The debt taken for the acquisition of Cairn has to be repaid over the next
two years and cash flow from operations is expected to be lower than the
repayment.