We aim to build a company like BHP Billiton, Vale

Updated: Feb 27 2012, 09:08am hrs
On Saturday, Vedanta Resources said it will merge its Indian subsidiaries, Sesa Goa and Sterlite Industries India, to form Sesa Sterlite, creating a natural resources giant with $10 billion in revenues annually and expected to be the seventh largest global diversified natural resources company by Ebitda. The swap ratio for the merger has been set at 5:3, which means three shares of Sesa Goa will be issued for every five existing Sterlite shares. The merger will also see Vedantas two other subsidiaries, Vedanta Aluminium (VAL) and Madras Aluminium Company (MALCO), being merged into Sesa Sterlite. Moreover, Vedantas direct holding of 38.8% in oil and gas explorer Cairn India will be transferred to Sesa Sterlite, together with Vedantas debt of $5.9 billion. Following the transfer, Sesa Sterlite will have a 58.9% shareholding in Cairn India. In the entire merger process, Vedanta will own 58.3% shareholding in Sesa Sterlite.

In a media interaction, the Vedanta Resources management led by chairman Anil Agarwal, deputy executive chairman Navin Agarwal, group director (finance) Tarun Jain, Sesa Goa CEO PK Mukherjee and Cairn India CEO Rahul Dhir explained the rationale of the deal, the gains to Sesa Sterlite shareholders despite the huge debt transferred to the company from the parent, and Vedantas plans for acquiring the governments stake in Balco and Hindustan Zinc (HZL). Edited excerpts from the interaction:

What is the rationale behind merging Sesa Goa into Sterlite

Anil Agarwal: We are a country of 1.2 billion people and in both India and the world, resources are very important. Look at companies like BHP Billiton and Vale, which have grown out of their countries on the basis of resources. We are still very small compared to them. We aim to build a company like them based on resources. Shareholders have been demanding for the last four-five years to merge our holdings in India.

PK Mukherjee: This was because certain regulatory rights were there and this was the most efficient way of merger. The logic is that the commodity cycle risks are mitigated. Number two, because of the better multiple as a result of the merger, the shareholders get a better valuation. Finally, on a trailing 12-month basis, the EPS improves.

Anil Agarwal: We have a synergy saving of R1,000 crore putting together the capex programme and interest cost.

How much will valuations improve after the merger and what is likely to be the market valuation of the company

Anil Agarwal: This company is likely to be the seventh largest natural resources company in the world and our assumption is that the valuation is likely to be $20 billion.

How much will the new company generate in terms of revenue

Anil Agarwal: We will be generating about $10 billion. This is very important for us because most of our capex programme is complete. We feel that the valuation is very strong for the new entity. All new acquisitions will happen through Sesa Sterlite.

Sesa Sterlite will have a debt of $13.5 billion. How will the company service this debt

Navin Agarwal: As far as the balance sheet of Sesa Sterlite is concerned, in spite of the debt coming along with Cairn India, we are very comfortable. There is no concern about servicing that debt. The debt-to-equity ratio is very comfortable.

Considering Vedanta Aluminium has been making losses, how was the valuation arrived at

Navin Agarwal: A lot has been made about the VAL valuation. But the kind of asset that has been created is a world class asset. Theres 2.5 million tonnes of integrated aluminium assets. Even if the valuation was $100 million, it would not have that big an impact on the final transaction. What is important is what is being created in the larger picture.

Anil Agarwal: Also, we valued VAL at book value.

Tarun Jain: This means that whatever amount we invested in equity, only that is being considered in the valuation. This is very conservative.

The share swap ratio of 5:3 seems to be against the minority shareholders of Sesa Goa, because Sterlites valuation is being kept at R41,000 crore. How did you reach these valuations

Mukherjee: Market cap or comparative market capitalisation is one of the methods which valuers look at. But this is not the end of the story. The other thing is the discounted cash flow (DCF) method, then comparative market price over a period of time and finally the net asset-based valuation. Normally, weightage is given to all the three methods. This is the reason why independent valuers are appointed. Based on these, the valuation has been arrived at. For the three methods, 40% weightage was given to DCF, 40% to comparative market price and 20% to net asset value. The valuation has been tested by a third valuer and they have given a fairness opinion to the board after which we decided the share swap ratio.

Jain: If you look at the one-year price of both the companies, the ratio comes to 0.6. It is not a one-day price that decides the value, we took a year-long value. In case of merger, the valuations are relative valuations. MALCOs valuation has been done purely on the basis of its holding in Sterlite.

Coal is still missing from your portfolio. How do you plan to plug that hole

Anil Agarwal: Coal is much needed in our portfolio. The government plans to auction coal blocks, we will take part in those auctions for shareholder value enhancement. We also have a coal block with Bharat Aluminium, which is of very high quality, and we will start production this year. We are also looking at getting blocks in Latin America.

When will Vedanta acquire government stake in Balco and HZL

Anil Agarwal: We have benefited from the governments shareholding. We get support from them. But they have always wanted to divest their stake. They have sent a letter of intent. We have sent them an offer. The process is going on but it should be completed by the end of the year. The other thing is that it will be an expensive acquisition; we also need to see where we can raise funds for this.

What are your plans regarding Sterlite Energy

Jain: Sterlite Energy is merging into Sesa Sterlite. There are no plans of listing it. Going forward, Sterlite Energy is likely to become the captive power source for Vedanta Aluminium as and when they expand.

What are your plans for ramping up production for Cairn India

Rahul Dhir: We are excited about the resource base we have in Rajasthan. In the near term, we are targeting 175,000 barrels per day from Rajasthan. Some time in 2013, we are looking to get to 240,00 barrels per day. Beyond that, we have 6.5 billion barrels of oil in Rajasthan so we believe that this will sustain our production. We are exploring in Sri Lanka and onshore in the KG (Krishna-Godavari) basin. This gives us the confidence that we can sustain and grow the business substantially over the next few years.

Can you explain the rationale for taking on VALs debt

Jain: The debt is $4 billion but look at its capacity and captive power plant. It has an investment of $10 billion against which debt is $4 billion. For this kind of asset, to replicate this would take 6-7 years and capital cost has gone up 70-80%. So please look at this in totality.

Why do you want to transfer the risk or debt of Vedanta to the Indian company

Mukherjee: Cairn Indias asset is coming with the debt. Sesa share holders are getting a share of the zinc business, the balance sheet size is going up. We are becoming shareholders of a diversified company where price to earnings ratio is becoming higher.

Jain: You are only looking at one side where debt is going away from Vedanta, but the full asset of Cairn India is also going away from the Vedanta books. This is how any transaction takes place. The company is also getting R6,000 crore of Cairn Indias profits.

Anil Agarwal: Let us look at the overall picture. The total debt is $9 billion. In that you are getting a world-class hydrocarbon oil and gas company, the largest producer of iron ore, close to 3 million tonnes of integrated aluminium. You are getting zinc, you are getting silver. These kind of assets are coming only with $9 billion debt. To replicate these assets the cost will be $25 billion.

What benefits does Vedanta derive from this merger

Anil Agarwal: Vedanta was very comfortable to service the debt. That was not the issue. But Vedanta shareholders always wanted a simplified structure. We understand their demands of having one holding company and one operational company. So Vedanta will be holding company and Sesa Sterlite will be the operating company.