THE EPIC MERGER - IT'S ONCE AGAIN ALL ABOUT SWAP RATIO

By Ruma Dubey

Like a dog which doggedly never gives up on its bone, Anil Agarwal too is once again reviving the plan to consolidate all his business under one umbrella, with Sterlite Industries being the holding company.

There are newspaper reports suggesting that Vedanta Resources is giving final touches to a merger of Sesa Goa with Sterlite Industries, creating a Rs 40,000-crore metals giant. This will also mean that Cairn India will get realigned with the new entity.

This is a restructuring plan which had been initiated by Anil Agarwal in 2008 but at that time, because the complicated swap ratio was extremely detrimental to the minority shareholders, under pressure from the investors, the plan had to be dropped.

Currently Vedanta has a 55.1% stake in Sesa Goa, 53.3% in Sterlite Industries and 38.8% stake in Cairn India.  As per news, Sesa Goa would be merged into Sterlite Industries, which would be the main operating arm.  Vedanta will even transfer its shares in Cairn India to Sterlite. Sesa Goa too has a 20% stake in Cairn India.  And Sterlite owns 64.9% stake in Hind Zinc. Thus under the new plan, all its metal business, as well as Sesa Goa will come under Sterlite, which will thus become a holding company.  Thus Vedanta group is transferring stakes held by them to Sterlite Industries.

It is Cairn’s stake holding which gets completely realigned.  With Sterlite’s 38.8% stake, Sesa Goa’ s 20% stake, post the proposed merger, Sterlite will hold 58.8% stake in Cairn.

This restructuring is important to Vedanta, more so, because the company is trading at a discount on the London bourses and this is mainly because of its structure due to which it is difficult for it to repatriate cash from subsidiaries to service group debt. Vedanta is stated to have a debt of around US$ 9 billion or Rs.45,000 crore. And in 2012, it needs to generate  around $550-million or Rs 2,750-crore to service just the interest component of its debt. Thus with this merger, the debt of Vedanta will get transferred to a robust holding company in India, Sterlite Industries.

This move to realign, on face value, is good news because it is indeed simplifying the holdings and bringing it all into one. But once again, it all depends on the swap ratio as that was the bone of contention in 2008 too, going completely against the interest of the minority shareholders. At that time, Sterlite Industries wanted to demerge its aluminium and energy businesses to MALCO and Vedanta was to transfer its 79.4% equity interest in Konkola Copper Mines plc ("KCM") to Sterlite.  The swap ratio - MALCO was to to issue equity shares to the shareholders of Sterlite in the ratio of  7 equity shares of rupees two each of MALCO for every 4 shares of rupees two each held in Sterlite. That’s not all. Sterlite was to issue one share of  Rs.2 each in exchange for I share of US$0.01 each of  THL KCM Limited, a wholly owned subsidiary of Vedanta.  And for the shareholders of MALCO, they were to be issued one share of Sterlite for every 51 shares held in MALCO.

The key negative in the restructuring plan was the transfer of the Konkola copper assets from Vedanta Resources to Sterlite at a 1:1 share-swap ratio. This ratio was expensive and hurt the interests of Sterlite’s minority shareholders. Institutional investors opposed this move, forcing Vedanta to cancel the proposed restructuring.

This time around, rumour mill has it that in all likelihood, the swap ratio could be in the ratio of 2:3, meaning two shares of Sterlite for every three shares held of Sesa Goa.

Many, including our Editor, Mr SP Tulsian are of the view that this restructuring move is a precursor to initiate purchasing the residual stake of the government to the extent of 29% in Hindustan Zinc and 49% in BALCO. He is of the opinion that, to do this, it will require around Rs.17,000 to 18,000 crore for Hind Zinc and Rs.4000-5000 crore for BALCO. And this cash is expected to come from Cairn India where Sterlite will be holding 58.8% stake. Cairn, as per Mr.Tulsian is expected to generate a cash profit of about Rs 10,000 crore every year and it is this which will be used to buy out the residual stake. If this is indeed the strategy, it is a good move as it increases the valuation of Sterlite without stretching its balance sheet. And thus good for the shareholders of Sterlite too.

Anil Agarwal is yet to reveal his cards and till then, we can only speculate over what can be done and what cannot. But ultimately, it all boils down to one and only one point – the swap ratio.

Hopefully, Agarwal has learnt his lessons in 2008 and this time around, will not compromise on the interest of the shareholders. Let’s wait and watch this epic sequel drama unfold.