Vedanta to Combine Its Sterlite Industries Unit With Sesa Goa to Cut Debt

By Abhishek Shanker and George Smith Alexander - Feb 25, 2012 6:43 PM GMT+0530



Sesa Goa (SESA) Ltd. and Sterlite Industries (India) Ltd. (STLT), controlled by billionaire Anil Agarwal, will combine to reduce the debt of parent Vedanta Resources Plc (VED), which paid $8.67 billion to buy Cairn India Ltd. in December.

Sesa Goa, India’s largest iron-ore exporter, will absorb Sterlite in an all-share transaction, London-based Vedanta said today in a statement. Investors will get three Sesa Goa shares for five shares of Sterlite. Vedanta will transfer for a token $1 its 38.8 percent holding in oil producer Cairn India, including a debt of $5.9 billion, to Sesa Sterlite, the new company that will hold 58.9 percent of Cairn India.

Vedanta, with no previous experience in oil and gas projects, is trying to boost its finances and ratings after buying Cairn India and gaining access to the nation’s biggest onshore oilfield. Moody’s Investors Service on Jan. 12 cut Vedanta’s bond rating and maintained a negative outlook following the acquisition, which pushed the total debt of the group to $9.65 billion.

“This will help Vedanta improve its debt profile as the loans taken to buy Cairn will be transferred to Sesa Sterlite,” said Abhisar Jain, an analyst at Centrum Broking Pvt. in Mumbai. “This will be a positive since Cairn has a good cash flow.”

Vedanta Aluminium Ltd., the Indian aluminum unit in which Vedanta owns a 70.5 percent stake, and Madras Aluminium Co. will also be consolidated into the new company, according to the statement. The transfer of Cairn India shares won’t be conditional on the merger of Sesa, Sterlite, Vedanta Aluminium and Madras Aluminium, according to the statement.
Interest Cost

Vedanta’s debt will fall 61 percent to $3.8 billion and the debt-service cost will be reduced by $300 million for the year ending March 31, 2013, the company said in a presentation after announcing the merger. Cairn India’s debt, which bears an annual interest cost of 5.2 percent, will continue to be guaranteed by Vedanta, Group Chief Financial Officer Tarun Jain said at the conference.

Vedanta is seeking coal assets in Latin America and all future acquisitions will be made by Sesa Sterlite, Deputy Chairman Navin Agarwal said today at a media conference in Mumbai. The group’s reorganization is outside the purview of the competition commission, Jain said.

Sterlite rose 3.1 percent, the most in a week, to 118.60 rupees in Mumbai yesterday, while Sesa dropped 0.2 percent. Cairn India Ltd. (CAIR) was almost unchanged at 381.35 rupees. The benchmark Sensitive Index fell 0.9 percent.
Capital Spending

Sesa Sterlite will have a net debt of $7.5 billion and an average interest cost of 8 percent, Jain said. Capital spending will be $6 billion in the next three years, he said.

Cairn India will announce a dividend based on fixed payout and will also give one-time payout in the next two to three months, Chief Executive Officer Rahul Dhir said today on a conference call. The transaction was valued by Grant Thornton LLP and KPMG LLP, which used discounted cash flows, market value and asset value to determine the swap ratio. Citigroup Inc. provided a fairness opinion to Sesa Goa, while Bank of America Corp. did the same for Sterlite.

The merged entity, in which Vedanta will hold a 58.3 percent stake, will help save $200 million annually, Navin Agarwal said earlier on a conference call. The merger will probably be completed this year, he said.
Simplified Structure

“Sesa Sterlite will be one of the largest global diversified natural resources majors,” Chairman Anil Agarwal said today in the e-mailed statement. “This transaction is a natural evolution, leading to simplification of the group’s structure.”

Sterlite, which is seeking to buy the Indian government’s remaining stake in Hindustan Zinc Ltd. (HZ) and Bharat Aluminium Co., may complete the transaction this year, Anil Agarwal said. Sterlite bought 51 percent of Balco in 2001 and a majority stake in Hindustan Zinc a year later.

Vedanta Aluminium, whose proposal to expand its alumina refinery in the eastern state of Orissa sixfold to 6 million metric tons, was rejected by a court, is running its smelter at 30 percent capacity, Anil Agarwal said today at the conference. The company is “confident” of getting a bauxite mine, he said. The court had said Vedanta’s plant could be sourcing bauxite from mines without environmental approvals.

To contact the reporter on this story: Abhishek Shanker in Mumbai at ashanker1@bloomberg.net

To contact the editor responsible for this story: Rebecca Keenan at rkeenan5@bloomberg.net

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