Mumbai: The shareholders of Sesa Goa Ltd, who will gather on Tuesday to vote on the company’s proposal to create a new merged entity Sesa-Sterlite, not only have to evaluate the merits of the split verdict of two proxy advisory firms but also the extent to which the recent acquisition of bauxite mines by the parent Vedanta group could sweeten the debt-laden deal for them.
Sterlite shareowners will face a similar dilemma on 21 June when they vote in Tuticorin.
Minority shareholder activist, Institutional Investor Advisory Services, or IIAS, recommended voting “against” the proposal in its report last week citing “operational hurdles of VAL (i.e. mining rights) and the additional debt of VAL (Vedanta Aluminium Ltd) and Cairn India Ltd (total of Rs 50,000 crore) that will be transferred to the combined new entity without fully resolving issues with regard to mining”.
It also picked on the “premium valuations” at which VAL is being transferred to Sesa Sterlite, giving London-listed Vedanta Resources Plc.’s shareholders a “gain of at least Rs 1,640 crore”.
Another such adviser, Bangalore-based InGovern, has overall recommended voting “for” the merger, squaring off the extra debt with “the transfer of cash and equivalents of Rs 21,546 crore (as in December 2011)” to the new entity. But it has given a “starred” recommendation, adding caveats that shareholders should “weigh the risks associated—allegations of human rights violations, environmental risks—with VAL and raise these concerns” with the management.
The proposed merger of Sesa Goa with Sterlite Industries India Ltd, Madras Aluminium Company Ltd, Sterlite Energy Ltd, Cairn India and Vedanta Aluminium—all subsidiaries of the Anil Agarwal-controlled Vedanta Resources —will create a merged entity with “a considerably higher net debt of $7.5 billion” as compared with the current $900 million (about Rs 5,504 crore) on Sesa’s book, according to a 16 June research report by Barclays Capital Inc.
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The group has since added some assets through its highly-leveraged and bleeding subsidiary Vedanta Aluminium, which could weigh in favour of the transaction. The aluminium manufacturer recently acquired a stake in Raykal Aluminium Co. Pvt. Ltd, promoted by Larsen and Toubro Ltd, according to an 11 June PTI story, which will give it access to two bauxite mines—a crucial raw material it needs to turn profitable.
A Vedanta group spokesperson reiterated that the merger would create the seventh largest natural resource company in the world and “significant value for all shareholders” but didn’t respond to specific queries on the Raykal stake acquisition.
Sesa Goa’s shareholders are going to vote on the proposed merger with Sterlite. But Mint’s Bhuma Srivastava says some minority shareholders are calling for a vote against it.
“We value VAL’s equity at negative $3.3 billion (vs implied valuation of $473 million in the proposed merger). The outlook for VAL remains uncertain given the unavailability of captive bauxite (Niyamgiri controversy) and alumina (environmental clearance issue),” wrote Barclays sector analysts led by Chirag Shah in the 16 June note.
But the recommendations do not factor in the impact of the Raykal acquisition. VAL will eventually acquire the entire holding for Rs 1,811 crore from Larsen & Toubro in a deal that will help it in securing bauxite for its one million tonnes yearly alumina refinery in Lanjigarh.
The two mines are estimated to hold about 250-280 million tonnes of the mineral and the entire bauxite excavated will be available for Raykal and VAL, the PTI story added.
“The problem for the entity as such is also with coal. The trouble with bauxite availability will be solved but coal issues for the overall group will remain. It is not known if the quantity of bauxite from these mines will be enough,” or what the cost will be, said Ravindra Deshpande, sector analyst with Elara Capital (India) Pvt. Ltd. He rued “too much information is lacking right now” to reassess the valuation of VAL.
Another Mumbai-based sector analyst with a foreign brokerage, who also didn’t want to be named, said the benefits from the Raykal buyout were “too deep down” and fraught with “too many issues”. “It won’t be an easy exercise for the company since they will have to apply for a ‘change of (end) use’ permission. That could take a while, so it is not like the bauxite will start flowing in immediately,” he added.
Sesa Goa dropped 1.4% to close at Rs 182.50 a share on Monday on the BSE, when the benchmark Sensex dropped 1.44% to close at 16705.83 points. Sterlite Industries lost 4.34% to close at Rs 95.90 a piece.
For the last one month, Sesa Goa lost 5.49% and Sterlite Industries lost 5%.
PDF by Sandeep Bhatnagar/Mint.