The Vedanta group, controlled by billionaire Anil Agarwal will seek its shareholders’ approval to increase its earlier offer price by up to $650 million (Rs 3,588 crore) to buy the Indian government’s stakes in Hindustan Zinc and unlisted Bharat Aluminium Co (Balco) on August 28. Cumulatively, the revised offer price of about $3.93 billion (Rs 21,717 crore) implies about 20 per cent increase in the UK-based group’s January offer. If the proposed stake sales go through, it will be positive for shareholders of both Hindustan Zinc and Sesa Goa, say analysts at Barclays Capital. Edited excerpts from their note to clients:
- Implications for Hindustan Zinc shareholders: The proposed offer price for Hindustan Zinc at the higher end converts to Rs 149 per share, a 14 per cent premium over Thursday’s closing price of Rs 130.40. Prima facie, this appears positive for Hindustan Zinc's shareholders. However, it is still not clear whether the Vedanta group would need to make an open offer to the minority shareholders in Hindustan Zinc at the same price.
- Implications for Sesa Goa shareholders: The key investor concern for “Sesa-Sterlite” has been its ability to service a large debt obligation of $7.5 bn (as per Barclays estimates for the merged entity), considering that cash flows from the different businesses are not strictly fungible currently. This is due to the fact that the cash generating entities of Cairn India and Hindustan Zinc are listed separately. A buyout of the government's stake (and subsequent minority buyout) for Hindustan Zinc would address this concern to a large extent as Hindustan Zinc has a cash balance of$3.5 billion and generates significant free cash flows ($1 billion in FY13 on our estimates). In addition, cash fungibility between the entities would also lead to a more tax efficient corporate structure.
