India's Vedanta Simplifying Share Structure as Platform for Growth

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This commentary follows on the heels of yesterday’s post on the Sesa Goa-Sterlite merger. 

Few believe that Indian billionaire Anil Agarwal’s planned merger of his sprawling empire of oil, gas, metals and iron ore mining firms into one coherent whole is solely about debt consolidation, simplification of shareholdings and some $200 million in cost savings. UK-based Agarwal has proved to be highly acquisitive in recent years, building Vedanta and its various majority- but not totally-owned subsidiaries into major players in a host of industries, but notably aluminum, zinc, silver, copper, iron ore; and with the completion of a $9-billion purchase of Cairn India last year, a major oil and gas producer.

Reuters reports that as a first step, Vedanta would merge non-ferrous metals producer Sterlite Industries into sister concern and iron ore miner Sesa Goa to create Sesa Sterlite, the eventual umbrella unit for other subsidiaries. Continuing the changes, Vedanta’s unlisted unit Vedanta Aluminum, along with Madras Aluminium Co., will be transferred to Sesa Sterlite, once the first consolidation is complete.

Vedanta’s 38.8-percent holding in oil and gas producer Cairn India will also be transferred to Sesa Sterlite, along with related debt of $5.9 billion, which is incurring a $500 million interest charge at the corporate level and making further borrowing difficult. The group’s holding in Hindustan Zinc and Bharat Aluminium Co. Ltd., in which the Indian government also holds a minority share, will remain unchanged for the time being, but Vedanta is negotiating to buy the shares it does not already own. The firm made a fresh cash offer last month, but is still waiting for a reply from the government.

Vedanta owns more than 50 percent in each of its group companies, but does not hold 100 percent in any, making the process more protracted than otherwise may be the case, as minority shareholders need to be brought along. But with Vedanta’s share price underperforming the mining sector of the UK stock market by 25 percent this last year, shareholders are keen for action to lift the share price.

The combined group could be valued at some $20 billion. The only part of the group that will remain part of Vedanta (but not part of Sesa Sterlite) will be Konkola Copper Mines in Zambia, in which Vedanta owns 79 percent, but with no cross-shareholdings between Konkola and any other Vedanta company, according to the Telegraph newspaper. Rumors have it that Vedanta may seek to list Konkola as early as next year to raise cash for further acquisitions elsewhere.

And this brings us to the nub of Mr. Agarwal’s strategy: the complicated cross-shareholdings and level of corporate debt following the acquisition of Cairn India have left Vedanta with an underperforming share price, high levels of debt and a complex shareholding structure. Simplification would yield some savings, but more importantly, easier access to capital and transfer of the debts to the operating units best able to service them.

This would free Agarwal to go back on the offensive. KPMG speculated in the Financial Times that the group could expand into new business areas — notably coal mining — where it is bidding on government mining rights, infrastructure, power and other areas in the oil and gas value chain, as it lays out plans to invest some $6 billion in Cairn India’s assets to boost production over the next three years.

For a former scrap dealer from Mumbai who left school at age 15, you can’t say Anil Agarwal lacked ambition. The drive that has seen him create a natural resources group in the top 15 companies in India by market capitalization, and the world’s seventh-largest diversified miner by core profit, according to the FT, is likely to see plenty more growth in the years to come.

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