Just as the Best Exotic Marigold Hotel in Jaipur, the retirement home in the British film comedy, proves to be less luxurious than advertised, Vedanta Resources at times dismays its investors. They criticise the opaque structure and debt profile of Indian billionaire Anil Agarwal’s London-listed metals, mining and oils group. Now, he has listened and donned his Marigold gloves to give India-focused Vedanta a spring clean.
The proposed restructuring starts with the merger of Vedanta’s Indian iron ore subsidiary Sesa Goa and copper producer Sterlite Industries, establishing Sesa Sterlite as its Indian operating company. Next, he will fold 70 per cent of Vedanta Aluminium and 40 per cent of newly-acquired Cairn India into the opco – with $5.9bn of related acquisition debt – plus Madras Aluminium Company. Vedanta will end up with 60 per cent of Sesa Sterlite and 80 per cent of a Zambian copper miner.
Ostensibly (and immodestly) Mr Agarwal claims Sesa Sterlite will be India’s first global natural resources business – and the world’s seventh largest by earnings before interest, tax, depreciation and amortisation, with an implied valuation of $20bn. And for New Delhi’s consumption, he emphasised the opco’s pro-forma $2.5bn contribution to India’s coffers.
But this deal is really about debt reduction at Vedanta. With the Cairn India acquisition debt transferred to Sesa Sterlite (albeit part-guaranteed by Vedanta), group net debt will fall from the $10bn inked in by Credit Suisse for the group’s March year-end to $3.8bn, a covenant-friendly three-quarters of the broker’s ebitda forecast. Throw in after-tax cost synergies of $200m annually and Mr Agarwal is plainly gunning for a re-rating of Vedanta’s shares, which lost 35 per cent in the past year. For that, investors need to trust that he is not house cleaning ahead of more debt-fuelled expansion. Vedanta’s best hope is to live up to its hype.
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