Vedanta readies financing for acquisition

Plans to fund the deal through debt, Sesa Goa’s cash reserve.

For the acquisition of a majority stake in Cairn India, London-listed Vedanta Plc plans to fund up to $9.6 billion by raising debt of $6.5 billion and using the cash reserve of group firm Sesa Goa up to $3 billion.

UK-based Standard Chartered Plc, lead financier for this transaction, may provide as much as $5 billion in loans to Vedanta Resources Plc for the proposed acquisition, said banking sources. Credit Suisse Group AG, Goldman Sachs Group and JPMorgan are the other financial advisors to Vedanta.

“The loan is for two years; after that, we may look at refinancing this facility. We are quite comfortable now, based on our cash flows,” said Anil Agarwal, executive chairman, Vedanta Plc.

The company said the $6.5 billion of debt would mean an annual interest cost of $350 million. It also said the company would be able to meet all the covenants or debt parameters on the new and old debts.

The iron ore mining major, Sesa Goa, would be acquiring a 20 per cent stake in Cairn India, while Vedanta Plc is acquiring 31 to 40 per cent. As on June 30, Sesa Goa had cash balances worth Rs 8,054 crore (nearly $1.78 billion) and it intends to take its cash surplus to Rs 13,500 crore (nearly $3 billion) through internal accrual by the end of this financial.

While this may happen, the company might have to give up or postpone its plans to acquire more iron ore mines, its core business. “Its cash reserve will be exhausted,” said Giriraj Daga, an analyst with Khandwala Securites, a domestic brokerage. Anil Aggarwal said there was no immediate plan of Sesa Goa to acquire any iron ore mines.

For Vedanta Plc, $6.5 billion of debt would mean its net gearing of debt to equity increases to about 25 per cent at the end of 2010-11 from eight per cent in 2009-10. This is still seen as sound, as it has $7.2 billion of cash and cash equivalents at a consolidated level. “However, Vedanta may not be able to use cash on the books of Hindustan Zinc and Balco (totalling $3 billion), as both the companies have government nominees on the Board,” say analysts at HSBC.

“It is likely the company would raise equity to service the debt,” said an analyst with a foreign brokerage, who did not wish to be named.