Vedanta, the FTSE 100 metals, mining and oil group, has announced the merger of various subsidiaries as the next step of its founder’s ambitious plan to build India’s first global natural resources business.
The India-focused group, which is controlled by UK-based billionaire Anil Agarwal, will form Sesa Sterlite through an all-share merger of iron ore miner Sesa Goa and Sterlite Industries, a predominantly zinc, silver and copper producer.
The new company will also include Vedanta’s holding in its oil arm Cairn India, bought last year for $9.6bn following a prolonged ownership battle, creating a business with an implied market capitalisation of about $20bn.
Vedanta says the new operating company, which also incorporates both Vedanta Aluminium and the Madras Aluminium Company, will deliver cost savings of about $200m per year, while reducing debt and improving access to capital.
Mr Agarwal said: “Sesa Sterlite will be one of the largest global diversified natural resources majors, supporting India’s industrial growth. This transaction is a natural evolution, leading to simplification of the group’s structure.”
The move to simplify followed extensive criticism by investors and analysts over Vedanta’s opaque and complex ownership set-up.
The new arrangement will see the group’s convoluted stakes in some half a dozen subsidiaries slimmed down to just two: a 58 per cent stake in Sesa Sterlite and a 79 per cent holding in Konkola Copper Mines, a Zambian copper business.
Mr Agarwal, a one-time scrap metal trader, is among the most colourful of India’s newest generation of business tycoons. He is estimated to be worth $3.5bn, and was ranked number 16 in Forbes magazine’s 2011 list of wealthiest Indians.
Analysts point in particular to his reputation for exuberant dealmaking, earned during a spate of acquisitions over the past five years in areas ranging from iron ore to zinc, in addition to the protracted, high-profile Cairn deal.
Arvind Mahajan, head of natural resources and infrastructure at KPMG India, said: “Overall it seems sensible to create a structure which is relatively simple, and which may enable some cost to be taken out of the business.”
“But Mr Agarwal is known for being acquisitive in his areas of focus, so the interesting question is whether the deal’s benefits will be used to expand into new business areas, especially coal mining but also infrastructure, power or elsewhere in the oil and gas value chain.”
Any future expansion will also be boosted by the resulting reduction in Vedanta’s previously elevated debt levels, which have also been criticised by analysts, in part by the transfer of Cairn India’s $5.9bn net debt into the new company.
Sesa Sterlite will carry a net debt of $7.5bn, while Vedanta’s post-deal debt service liability will be reduced to $3.8bn, down from $9.5bn at the end of last year. Before the deal Deutsche Bank had calculated Vedanta’s debt would reach $11.7bn by the end of 2012.
Sesa Sterlite plans to list in India, where its implied revenues of $14.2bn in 2011 would make it among the country’s largest companies. The group said it would also become the world’s seventh-largest diversified natural resources company, as measured by earnings before interest, taxes, depreciation and amortisation.
The merger is expected to be completed by the end of 2012. It must approved by shareholders and various government bodies, including India’s competition commission, although analysts say it is not expected to face regulatory approval difficulties.
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