London Stock Exchange-listed Vedanta Resources moved a step ahead to merge its Indian subsidiaries to create a diversified mining and metals group. On Monday, iron ore miner Sesa Goa and copper-to-aluminium maker Sterlite shareholders approved creating the $14.5-billion Sesa Sterlite, the seventh-largest natural resources company by operating profit.
Sesa Goa said 91.70% of its shareholders, representing 79.12% of votes, approved the merger of Sterlite, Madras Aluminum and Vedanta Aluminum with itself, despite opposition from FII Franklin Templeton which owns 12.5%. 92% of Sterlite shareholders, too, voted for the merger with Sesa Goa. Vedanta now needs approval from the Foreign Investment Promotion Board (FIPB).
Sesa Sterlite will own iron ore, oil & gas, aluminium, power, zinc and copper ? insulating it from the cyclical nature of commodities and global volatility, besides saving R1,000 crore a year through synergies.
Vedanta chairman Anil Agarwal had said on February 25: ?Sesa Sterlite will be the principal operating company and with its high quality assets, growth projects and strong management, it will be well placed to create value for all shareholders.?
Sesa Goa rose 0.78% to R187.35 on the BSE while Sterlite fell 0.50% to R99.15. The market value of the merged entity at R49,513 crore has overtaken rival Hindalco?s R21, 968 crore at Mondays? price.
Vedanta expects the combined entity to earn more than $10 billion revenues a year, while operating profit is expected to be more than $5 billion.
Under the new structure, Sesa Sterlite will own 58.9% in Cairn India and full control in VAL and MALCO, but with rise in debt. The company?s consolidated gross debt will be $13.5 billion with an average interest cost of 8% raising analysts concerns. Vedanta?s debt will fall 61% to $3.8 billion.
?The consolidated entity would have to refinance its debt transferred from Vedanta as its cash flow will be lower than the debt servicing required over the next two years,? said Tarang Bhanushali of IIFL in a research note on February 28. ?High debt is one of the key risk to Sesa Sterlite. Dewang Sanghavi, analyst at ICICI Securities said in a note on February 28. But, some analysts say the company can service debt without much pain.
?The debt is not much of a concern as the company will also get a lot of operational assets with which they would be able to service the debt,? said Rakesh Arora, head of securities at foreign brokerage Macquarie Capital Securities in an earlier interaction with FE.
Although the merger creates a large diversified natural resources company, Sesa Sterlite would still have to overcome several risks to deliver the performance promised by the Vedanta management.
?The group has a number of significant expansion plans for its existing operations and planned Greenfield projects, which involve significant capital expenditure,? Vedanta told its shareholders. ?Any delay in completing planned expansions may have a material adverse effect on the Group?s businesses, operating results, financial condition and/or prospects.?