 "Merger of Vedanta companies will create a global giant")
Sesa Sterlite’s likely merger with Cairn India and Hindustan Zinc (HZL) could be the culmination of group chairman Anil Agarwal’s lifelong ambition to create a global mining & resource giant.
Early this week, Agarwal, promoter of the London-based Vedanta group, which owns 62.5 per cent stake in Sesa Sterlite, said in an interview to Press Trust of India that the company had appointed consultants to explore if it made sense to merge Cairn and HZL into Sesa Sterlite, the holding company. At present, the latter owns 59.9 per cent in Cairn India and 64.9 per cent stake in HZL.
If the plan goes through, the combined entity would be valued around $28 billion, far ahead of domestic peers and closer to global mining giants such as BHP Biliton, Rio Tinto, Vale SA, Anglo American, Glencore and ArcelorMittal (see table). At current market value, Agarwal’s company would be the world’s fifth largest metal & mining just behind Brazil’s Vale SA but ahead of ArcelorMittal, Posco and Anglo American.
Questions
The merger would, however, increase the complexity for retail shareholders, who will need to track almost the entire industrial commodity cycle to form an opinion about the company. The combined entity would be one of the most diversified of resource companies, with presence in almost all ferrous and non-ferrous metals, beside oil & gas. Given the different business cycle for various commodities, it will reduce earnings visibility.
Apart from access to cash, there is little operational synergy between the three operating companies. “All businesses are completely different. Apart from cash control, Sesa will have no benefit in the merger,” said an analyst with a foreign brokerage.
“A lot of things need to be known like the merger ratio, benefits to minority shareholders and dilution of shareholding. All this is going to take time,” said Sankalp Baid, analyst with India Ratings.
That seems remote. The two companies were together sitting on cash & equivalents worth nearly Rs 44,000 crore at the end of FY14. Agarwal would rather use it to fund Sesa Sterlite capex than lose it to minority shareholders. The cash pile is more than half of Sesa Sterlite consolidated debt of Rs 80,566 crore at the end of March last year. Cairn India and HZL are debt-free.
Cairn and HZL also generate a lot of free cash flow that Sesa can tap to invest in its aluminium, copper, power and coal mining businesses. This is important at a time when metal & mining companies are facing a squeeze in profits and a poor credit rating profile that raises their funding cost. Cairn India and HZL both enjoy a higher rating (AAA) for their long-term rupee borrowing than Sesa Sterlite (AA+).
HZL, for instance, generated free cash flow (after paying for capex) at nearly Rs 6,000 crore annually in the past three years. That figure was nearly Rs 8,000 crore for Cairn India in the past two financial years.
Possibilities
Analysts say the merger will provide Sesa the firepower to bid for the captive coal blocks needed for survival of its integrated aluminium-cum-power business. Deployment of the funds by the Vedanta group company will have to be watched, said analysts.
“Given Sesa’s past record, where they made investments in the aluminium business when they were still to get all the clearances, a lot also depends on how Sesa Sterlite deploys the accessable cash,” said an analyst with a local brokerage.
Analysts say a merger, if it is to take place, has to go through several levels. In the case of HZL, nearly 30 percent of the stake is held by the government. Either Sesa will have to buy this before a merger or get government approval.
In a bearish metals’ scrip environment, Sesa’s shares declined on Wednesday by seven per cent, while HZL slipped four per cent. Cairn India ended a tad down on the BSE. The 30-share BSE benchmark index, the Sensex, lost 79 points to close at 27,347. The National Stock Exchange’s 50-share Nifty shed 22 points to close at 8,278.
Early this week, Agarwal, promoter of the London-based Vedanta group, which owns 62.5 per cent stake in Sesa Sterlite, said in an interview to Press Trust of India that the company had appointed consultants to explore if it made sense to merge Cairn and HZL into Sesa Sterlite, the holding company. At present, the latter owns 59.9 per cent in Cairn India and 64.9 per cent stake in HZL.
If the plan goes through, the combined entity would be valued around $28 billion, far ahead of domestic peers and closer to global mining giants such as BHP Biliton, Rio Tinto, Vale SA, Anglo American, Glencore and ArcelorMittal (see table). At current market value, Agarwal’s company would be the world’s fifth largest metal & mining just behind Brazil’s Vale SA but ahead of ArcelorMittal, Posco and Anglo American.
Questions
The merger would, however, increase the complexity for retail shareholders, who will need to track almost the entire industrial commodity cycle to form an opinion about the company. The combined entity would be one of the most diversified of resource companies, with presence in almost all ferrous and non-ferrous metals, beside oil & gas. Given the different business cycle for various commodities, it will reduce earnings visibility.
Apart from access to cash, there is little operational synergy between the three operating companies. “All businesses are completely different. Apart from cash control, Sesa will have no benefit in the merger,” said an analyst with a foreign brokerage.
“A lot of things need to be known like the merger ratio, benefits to minority shareholders and dilution of shareholding. All this is going to take time,” said Sankalp Baid, analyst with India Ratings.
That seems remote. The two companies were together sitting on cash & equivalents worth nearly Rs 44,000 crore at the end of FY14. Agarwal would rather use it to fund Sesa Sterlite capex than lose it to minority shareholders. The cash pile is more than half of Sesa Sterlite consolidated debt of Rs 80,566 crore at the end of March last year. Cairn India and HZL are debt-free.
Cairn and HZL also generate a lot of free cash flow that Sesa can tap to invest in its aluminium, copper, power and coal mining businesses. This is important at a time when metal & mining companies are facing a squeeze in profits and a poor credit rating profile that raises their funding cost. Cairn India and HZL both enjoy a higher rating (AAA) for their long-term rupee borrowing than Sesa Sterlite (AA+).
HZL, for instance, generated free cash flow (after paying for capex) at nearly Rs 6,000 crore annually in the past three years. That figure was nearly Rs 8,000 crore for Cairn India in the past two financial years.
Possibilities
Analysts say the merger will provide Sesa the firepower to bid for the captive coal blocks needed for survival of its integrated aluminium-cum-power business. Deployment of the funds by the Vedanta group company will have to be watched, said analysts.
“Given Sesa’s past record, where they made investments in the aluminium business when they were still to get all the clearances, a lot also depends on how Sesa Sterlite deploys the accessable cash,” said an analyst with a local brokerage.
Analysts say a merger, if it is to take place, has to go through several levels. In the case of HZL, nearly 30 percent of the stake is held by the government. Either Sesa will have to buy this before a merger or get government approval.
In a bearish metals’ scrip environment, Sesa’s shares declined on Wednesday by seven per cent, while HZL slipped four per cent. Cairn India ended a tad down on the BSE. The 30-share BSE benchmark index, the Sensex, lost 79 points to close at 27,347. The National Stock Exchange’s 50-share Nifty shed 22 points to close at 8,278.