Sesa - Sterlite Merger - Dumping Ground for Vedanta?

By SP Tulsian

It is shocking to see that some people do not learn from their past lessons, even when the lessons given were tough and hard hitting, sometimes, grounding their nose, hard into the earth.

Looks like 2008 was not enough for Mr.Anil Agarwal and his Vedanta group and he is back to his old habits. One look at the scheme of Sesa Goa-Sterlite Industries merger, having presented by the Group, following two conclusions can be drawn from it -

1) Vedanta Group has used India as dumping ground, to de-leverage its balance sheet, as also, to get rid of loss making units.

2) To create a mega Indian entity, to create a war chest, to acquire residual stake of 29.5% in Hind Zinc (for about Rs. 17,000 cr.) and 49% stake in BALCO ( for about Rs. 3,000 crores). by leveraging annual cash profit of close to Rs. 15,000 crores, on consolidated basis.

Take a look at the following pointers and the point which we are trying to make will get clear.

          · Cairn India Ltd

Ø Transfer of 38.83% stake, being 73,88,73,586 shares, held in Cairn India, by Vedanta Group to Sesa Sterlite, for debt of $ 5.9 billion.

Ø Cost per share of Cairn – $5.9 billion x Rs. 49/$ = Rs. 28,910 Cr.

Ø Cost per share = Rs. 391.                                                                           

                  Cairn – Closing on 24-2-12 – Rs. 381; Monthly High / Low- Rs. 401/ Rs. 335

         · Vedanta Aluminium Ltd. – (VAL)

Ø Sesa Goa is issuing 7.23 Cr. Shares for acquiring 70.5% stake in VAL.

Ø Valuation given to VAL at Rs. 2,332 Cr.

Ø Debt in the books of VAL is Rs. 20,000 crores

Ø VAL Q3 FY12 losses were at Rs. 1,140 Cr.

Ø VAL 9M FY12 losses were at Rs. 1,850 Cr.

Ø So, EV of VAL is at Rs. 22,300 Cr.

· MALCO acquisition –

Ø MALO valued at Rs. 1,790 Cr.

Ø Valuation grossly unfair –

a) 11.98 Cr. shares of Sterlite Industries Ltd., held by Malco, if valued at Rs. 118 per share, works out to, Rs. 1,415 Cr.

b) PAT of Rs. 187.56 Cr., posted by MALCO, for FY 11, if multiplied at 8 times = Rs. 1,500 Cr.

c) So conservative valuation comes at Rs. 2,915 Cr.

Ø MALCO recently, completed (offer closed on 15-2-2012) a buy back from its shareholders of 56.52 lakh Shares at Rs. 115 per share

Ø This is gross violation, as now, MALCO share has been valued at Rs. 159 per share.

· Sesa Sterlite will become heavy debt company –

  Rs. 5000 Cr. Sesa Goa.

  Rs. 15,000 Cr. Sterlite Industries.

  Rs. 29,000 Cr. Cairn India 39%

  Rs. 20,000 Cr.VAL Debt.

  Rs. 69,000 Cr. Total

·  Why stake in Cairn is stated at 58.9%, while it should be at 59% as per SHP of Cairn India, as at 31-12-2011 –

i) Twinstar Mauritius                         73.89 Cr Shares            38.83%

ii) Sesa Goa                                    35.11 Cr. Shares            18.45%

iii) Sesa Resources                          3.27 Cr. Shares               1.72%

(100% subsidiary of Sesa Goa)        112.27 Cr. Shares          59.00%

·         Foreign Currency risk transferred to Sesa Sterlite, for debt of $ 5.9 billion.

·         This whole exercise gave huge relief to Vedanta –

i) Got rid of loss making VAL

ii) Debt reduction of $ 5.9 billion

iii) Escape from risk of forex volatility on forex loans, for Indian projects.

iv) Deleveraged its own Balance Sheet.

v) Retained 79.4% stake in Konkola Copper Mines Plc

Like always, this merger scheme too is definitely detrimental to the interests of non-promoter shareholders of Cairn, Sesa, Sterlite and Malco shareholders. The effect on stock prices of various stocks are likely to be as under:-

i) Cairn India closed at 381 on Friday, may correct below 370.

ii) Sesa Goa closed at 227, is likely to correct to 205, recording a fall of about 8% to 9%.

iii) Sterlite Industries closed at 118, is likely to rule between 115-120, as it will rule based on 60% market price of Sesa Goa (swap ratio of 3 shares of Sesa for 5 shares of Sterlite held) less 5% of this effective valuation.

iv) MALCO being an unlisted company, will not be seen to be having any effect.

v) Hind Zinc will have neutral effect

It may also happen that the scheme may face ire of the institutional investors, which if it happens, can damage the repute of Vedanta Group further, which is already bad, due to old wounds. First bitten by the minority shareholders in 2008 and maybe now by the institutional investors, why does Vedanta follow this way of self-inflicting wounds? And how many more lessons before it mend its ways?