A section of minority shareholders, including institutions that hold close to 30 per cent in Sesa Goa and 20 per cent in Sterlite Industries, are not too happy about the valuation accorded to the unlisted firms in the merger.
Sources say some of these investors have put forth their concerns before the management. “It is obviously an attempt to mix liquid and non-liquid companies within the group,” according to a fund manager of a foreign fund which holds a chunk of Sesa Goa shares. “Sterlite is liquid with a lot of cash. Some other companies that are merged in it do not have cash. It releases cash for the group internally, which would have been difficult otherwise.”
A fund manager who holds Sterlite Industries in his portfolio, says the market is driven by returns. “If Sterlite continues to be on the index and enjoy the scarcity premium, its weight will go up. Those who sit out may end up looking like fools. So, corporate governance usually takes a back seat,” he adds. “But now, with many activist investors demanding action, sitting quiet may be difficult for institutions.”
Two unlisted firms Malco and Vedanta Aluminium (VAL) are merged into the new firm.
Analysts say both these firms are overvalued. According to an estimate, shares of Malco have been valued at Rs 159 apiece. This is much higher than the price of its recently concluded buyback offer at Rs 115, in which it bought back 5.6 million shares.
Similarly, in the case of VAL, the enterprise value accorded is over Rs 22,000 crore. This is sum of the value of Sesa Goa shares to be issued to the promoters and the debt in VAL’s books. While the company says VAL brings significant assets along, analysts say otherwise VAL has been taken into the merged entity at an EV/fixed assets value of 1.01x. “However, the current EV/fixed assets value of Nalco, a pure aluminium play, is 0.81x,” Nirmal Bang points out in a note to clients. “This implies VAL has been transferred in the merged entity at around 25 per cent premium to the market value.” This results in a transfer of value from the Indian listed firms to London-listed Vedanta Resources, say analysts.
Generally, whene value of private shareholding is unlocked like this, it is not in the interest of public shareholders, says Arun Kejriwal of Kejriwal Research and Investment Services.
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Leverage is another big issue. VAL comes with a net debt of Rs 19,695 crore. Besides, the $5.9-billion (Rs 28,797-crore) debt of Cairn India acquisition has also been taken on the books of the new entity, thereby freeing up the balance sheet of the overseas parent. The new entity Sesa Sterlite will have a net debt of Rs 36,936 crore, according to the company presentation.
“This move of merging Vedanta Aluminium may cause concern among shareholders,” according to SMC Capitals’ Jagannadham Thunug-untla. “This is because of Vedanta Aluminium’s large debt. With this, Vedanta Plc will be a clear beneficiary,” he says.
US-based Franklin Resources Inc is the largest institutional shareholder in the company, with 9.79 per cent holding. Vanguard, Blackrock, Robeco and Pioneer are other global funds holding the stock, according to Bloomberg. ICICI Prudential (0.61 per cent) and Templeton Asset Management (0.26 per cent) are the domestic institutions holding Sesa Goa shares.
A clutch of domestic institutions, including LIC (2.6 per cent), ICICI Prudential, HDFC MF, UTI MF and Reliance MF, are shareholders in Sterlite Industries.
Kejriwal also points out that the track record of the group is not very encouraging for investors. “The group implemented the concept of negative permission in an earlier merger between Sesa Goa and Sterlite Optic and got reprimanded by the courts,” he notes. Last year, it was again in the news over the non-compete fee payable in the Cairn-Vedanta deal.
The share-swap ratio looks skewed in favour of Sterlite. However, it has created scope for some quick-arbitrage plays on Monday, say some brokers. Here’s how: There is a clear arbitrage of 13 per cent for taking at the announced swap ratio. On Friday, Sesa Goa shares lost marginally, ending at Rs 227, while Sterlite gained three per cent to close at Rs 118. So, if an investor holding three Sesa Goa shares sells at this price, he gets a sum of Rs 681. One can buy five Sterlite shares for Rs 590 and pocket the remaining Rs 91.