Vedanta Resources plans to simplify its structure by placing all but one of its subsidiaries under the umbrella of a single unit, as part of a efforts to cut costs, improve access to cash and reduce the India-focused miner's debt burden.
FTSE-100 diversified miner Vedanta, which has underperformed the UK sector by more than 25 per cent since the start of last year, currently has a sprawling structure with over a dozen units, none fully owned and several separately listed, producing power and commodities from oil and gas to iron ore.
"The completion of Cairn India was the opportunity for us to complete our strategy of simplifying the group structure. This is something that has been sought by our shareholders and we have been thinking about it," Chief Executive M.S. Mehta told Reuters. "This was the right time for us."
Vedanta acquired Cairn India from UK oil and gas group Cairn last year for $8.7 billion, increasing the complexity of its structure and saddling the group with heavy debts. Its annual debt servicing burden is $500 million at the group level - but that will drop to $180 million as a result of the overhaul, as much of the Cairn debt passes to the subsidiary holding that stake.
"The restructuring was necessary, especially after the acquisition of Cairn India, because it was a large acquisition and they needed to do things in a much more organised way in India," said Jagannadham Thunuguntla, head of research at SMC Investments and Advisors in New Delhi.
As a first step, Vedanta said it 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.
The boards of the companies have approved the issue of three shares of Sesa Goa for every five shares held in Sterlite.
Continuing the changes, Vedanta's unlisted unit Vedanta Aluminium, along with Madras Aluminium Co, will be transferred to Sesa Sterlite, now the key operating unit.
Vedanta's 38.8 per cent holding in oil and gas producer Cairn India will be transferred to Sesa Sterlite, along with related debt of $5.9 billion. Sesa Goa already holds 20 per cent in Cairn India directly and the group plans to spend $6 billion over the next three years to double production from Cairn's India block.
Over $20B Valuation
The combined entity Sesa Sterlite is estimated to be valued over $20 billion, Vedanta Chairman Anil Agarwal, told reporters.
At current valuations, Sesa Sterlite would be in the top 15 companies by market capitalisation in India, Vedanta said, and the world's seventh largest diversified miner by core profit.
Agarwal, who quit school at 15, is estimated to be worth $6.4 billion and was the 14th richest Indian on Forbes magazine's list of the world's wealthiest people in 2011. Raised in Patna, in the eastern Indian state of Bihar, Agarwal began his business in Mumbai in 1976 as a scrap dealer.
"This transaction is a natural evolution, leading to simplification of the Group's structure," Agarwal said.
The simplified structure should also help the group continue to grow into new areas, and he told reporters the company was looking to acquire coal assets in Latin America and was awaiting the coal block auctions to be offered by India's government.
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, but Vedanta is negotiating to buy the shares it does not already own. Vedanta said it had made a fresh cash offer last month, but had not yet received a reply from the government.
Vedanta, which will own 58.3 per cent in Sesa Sterlite post-restructuring, now controls about 55 per cent each in Sterlite Industries and Sesa Goa.
The only one of Vedanta's assets to remain out of the Sesa Sterlite holding company will be its Zambian copper operation and one-time IPO candidate, Konkola, where it said there were no cross-shareholdings and therefore no simplification needed.
Rumours of changes to Vedanta's structure have lifted the stock this week, as investors welcome the possible change, but there is no guarantee of success. This is the group's second effort to overhaul its structure. A similar exercise in 2008 was aborted after investors opposed the plan.
On Saturday, Vedanta sought to reassure its minority shareholders by saying the restructuring will be earnings-accretive in the first year itself, and said the response from investors so far had been positive.
The group expects cost savings of $200 million a year from the restructuring, Deputy Chairman Navin Agarwal told analysts, adding the transaction was expected close in 2012.
Company officials however said they were targeting to complete the consolidation within 6 months.
Ratings agency Standard & Poor's said ahead of Saturday's announcement, the group's restructuring would improve its ability to service its debt obligations, but may take time to implement as it is subject to approval from a number of minority shareholders and regulators in Britain and India.