Thursday, 23 February 2012

News Hour- Vedanta Resources group may merge iron ore firm Sesa Goa with copper and aluminium maker Sterlite Industries

MUMBAI: The Vedanta Resources group may mergeiron ore firm Sesa Goa with copper and aluminium maker Sterlite Industries as it tries to simplify a complex corporate structure and deal with challenges to its main businesses.

The exercise, which is still on the drawing board, will create agiant metals and mining firm with the third-biggest profit in the private sector after ONGC and Reliance Industries. It will have a combined market cap ofRs 66,000 crore, or about $14 billion, more than double that of Sterlite's nearest rival Hindalco Industries.

The merged entity would straddle across all major resources, including oil, iron ore, aluminum, copper, zinc and lead, and will make Sterlite's parent, Vedanta Resources, owner of the entire shareholding of recently-acquired Cairn India.

"Vedanta's stated strategy is to simplify and consolidate its corporate structure. The management reviews options to deliver this strategy on an ongoing basis and will update the market as appropriate," a Vedanta spokesperson said.

A Delhi-based law firm has been asked to work on legal requirements for the merger.

Creating a Behemoth 

Sterlite fell 3.4% to Rs 128.40 on the news while Sesa gained the most, rising 3.5% before ending marginally down at Rs 246.70. Over the past month, Sterlite has risen 19% while Sesa has fallen 1.1%.

Sterlite Industries posted revenues ofRs 30,248 crore for the fiscal year ended March 2011 and profit of Rs 7,322 crore. Sesa revenues were Rs 10,138 crore while net profit was Rs 4,222 crore.

According to another person aware of the work on the restructuring, "The move will also enable using surplus resources to grow other subsidiaries. For instance, Vedanta Aluminum needs funds to shore up its finances as accumulated losses have wiped out all equity investments made by promoter companies," he added.

Vedanta officials have been considering various options to simplify the unwieldy structure under which three of the six Indian companies are directly owned by the global parent. The rest are either co-owned with Indian subsidiaries or the government.

Vedanta Aluminum is 30% owned by Sterlite Industries, and 70% by Vedanta Resources. London-listed Vedanta also owns about 53% directly in Sterlite Industries, 55% in Sesa Goa and 64.9% in Hindustan Zinc. Cairn India, acquired recently from Cairn Plc UK, is owned by Sesa Goa and Sterlite while Balco is majorityowned by Sterlite. Vedanta Aluminum is owned by Sterlite and Vedanta Resources.

The government is also a shareholder in some companies, owning 49% in Balco and 29.5% in Hindustan Zinc. Vedanta believes that merging Sesa and Sterlite will create one big company for all major mining and metals businesses.

Balco and Hindustan Zinc will continue to be separate affiliates due to the government ownership while Cairn will be a subsidiary of Sterlite-Sesa, instead of functioning separately.

The merger could also give the group access to Sesa Goa's cash, which could be used to fund investment plans of the merged company and some other group companies if required. For instance, Vedanta needs to raise money to buy out the residual government stakes in Balco and Hindustan Zinc. At current market cap, they are estimated to cost Rs 21,000-22,000 crore. Sesa had cash of Rs 4,000 crore on December 2010 and financed the open offer transaction to buy 24% in Cairn India. 

Some of the Sterlite-Sesa cash can be used for the group's aluminum project, which has been affected by approval delays from the government and high debt. 

Sterlite has invested Rs 9,450 crore so far in Vedanta Aluminum. Vedanta does not have an enviable record when it comes to pushing through group restructuring proposals. 

In 2002, Sterlite Industries wanted to buy back 50% of its shares from the public under a court-approved scheme of arrangement instead of the regular buyback rules of the Companies Act.


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