Reverse merger to access subsidiary’s cash
The Anil Agarwal-led oil and metal major Vedanta Resources on Tuesday hinted that it is exploring merging all its Indian subsidiaries to form a single natural resources company. The major gain from the development, as and when it happens after getting the nod of shareholders and other requisite approvals, would be that the debt-burdened Vedanta Resources would be able to access cash that is on the books of the other group firms where it has majority stake.
In a filing to the London Stock Exchange, Vedanta Resources said that it is looking at the merger of its Indian-listed firm Vedanta Ltd with Cairn India, which is into gas and oil exploration. The company also said that it is also looking at the possibility of a transaction with the government in two other firms — Hindustan Zinc and Balco — in which the government has minority stakes. The company said that in all such cases the reverse merger route could be adopted.
Under a reverse merger a bigger company merges into a smaller one. Even a listed and an unlisted entity can merge in such arrangements.
Though it could not be independently confirmed, sources said that the board of directors of Cairn and Vedanta are scheduled to meet shortly to discuss the proposal. The aim is to complete the transaction by March 2016.
Analysts said the move would be positive for Vedanta but a dampener for Cairn India and Hindustan Zinc since the former has huge debt while the latter have loads of cash. This was quite evident in the way the share prices of the respective companies reacted to the development. While shares of Cairn India closed down 4.3% at Rs 173 each, Vedanta Ltd closed up 3.1% at Rs 182.55 on the BSE.
“Should a transaction with Cairn India proceed, it could potentially be considered a reverse takeover. In addition, in line with the group’s stated strategy to continue to simplify the group structure, the group continues to evaluate a transaction with the government of India in relation to their minority stakes in Hindustan Zinc Limited and Bharat Aluminium Company,” Vedanta Resources said in a statement.
In a separate filing to the BSE, Vedanta Ltd said, “The company’s stated strategy is to simplify and consolidate its corporate structure. Management reviews options to deliver this strategy on an on-going basis. We are aware of the company’s disclosure obligations under Clause 36 of the listing agreement. The company will abide by its obligations to make appropriate disclosures as and when such disclosures are necessitated by decisions taken by the company.”
The standalone debt of Vedanta Ltd after excluding liabilities of its subsidiaries stood at Rs 37,636 crore as on March 31.Cairn India, in which Vedanta holds a 59.9% stake, had cash and cash equivalents of about Rs 17,000 crore at the end of FY15. Similarly, HZL in which the Centre holds a 29.5% stake, has cash of around Rs 30,000 crore.
“Such a merger, if it does happen, would be positive for Vedanta and a dampener for Cairn India,” Piyush Jain, equity research analyst (energy, industrials and utilities), Morningstar, was quoted as having told a business news channel. “With a pile of debt in one hand and loads of cash in its subsidiaries on the other, Vedanta would have a direct access to all these subsidiaries — like Hindustan Zinc and Cairn,” Jain was quoted as having said.
Analysts also said that the planned mergers would not be easy as it would depend on minority shareholders and what kind of swap ratios they get.
Vedanta chief Anil Agarwal in January had said the company is mulling merging cash cows Cairn India and Hindustan Zinc into his flagship Vedanta Group firm to create a global natural resources giant to rival Rio Tinto or BHP Billiton. He had said consultants had been appointed to explore if it would make sense to merge the two firms into Vedanta and will look at if it made sense to “keep oil and gas and energy companies separate or merge Hindustan Zinc, merge Cairn, so that we can have a company like BHP. That can be one model. It all depends on shareholders… How value can be created, how smooth. We are open for merger if the recommendation comes,” he had said.