Investor thumbs down to Sesa Goa & Sterlite merger

Written by Debabrata Das | Mumbai | Updated: Feb 28 2012, 08:29am hrs
Investors on Monday gave a thumbs down to both Sesa Goa and Stertlite Industries, which had over the weekend proposed to merge. Last Saturday, the boards of both companies had agreed to merge by offering three shares of Sesa Goa for every five shares of Sterlite Industries.

LSE-listed Vedanta Resources said 38.9% stake held by the British company in Cairn India, 70.5% in Vedanta Aluminum (VAL) and 94.8% in Madras Aluminum will be transferred to Sesa Sterlite, the merged entity.

Sesa Goa lost R2,065 crore as it closed lower by 10.45% on BSE on Monday at R203.60 and Sterlite wiped off R1,014 crore of its value as it fell by 2.53% to end at R115.65.

Analysts have raised concerns on VALs value of R2,332 crore to merge with Sesa Sterlite.

VAL stake transfer may not find favour with Sesa shareholders, said Chirag Shah, India Metals & Mining Analyst, Asia Ex-Japan Equity Research of Barclays Capital Research.

We continue to assign a negative equity value to VAL as we believe that the EBITDA generation will not be enough to meet the interest payments in the absence of captive bauxite, said Abhijeet Naik of foreign brokerage firm CLSA.

The company, however, is bullish about the project. VALs managing director, SK Roongta said it is a world-class asset. We are operating at 30% now but we plan to ramp up to full capacity by 2013-14.

Analysts, however, question delay to source bauxite. Delays in bauxite mine allocation would continue to affect VALs profitability, thus, having a stronger impact on the merged entity compared with the current scenario where VAL is an associate of Sterlite, said HSBC Global Research.

VAL has accumulated losses of around $400 million, the parent company told analysts in Mumbai on Saturday. The transaction will result in merging the considerably high and consistent cash burning VAL with good cash generating entities to meet VALs ongoing funding requirements, Kotak Securities said in report released on Monday.

Also, the 100% share in the huge losses at profit after tax level of VAL will come into the merged entity and would hurt consolidated earnings of Sesa Sterlite, the report added.