HZL divestment opportunity for Vedanta to consolidate Indian metals businesses
2 min read 21 Jan 2014, 10:45 PM ISTSesa Sterlite is likely to be an aggressive bidder in the auction, assuming there is competition to buy the residual stake
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The government’s nod for selling its residual stake in Hindustan Zinc Ltd (HZL) could help the Vedanta group move closer to a more complete consolidation of its Indian businesses.
Sesa Sterlite Ltd, the listed Indian flagship of the group, owns a 64.9% stake in HZL while the government owns a 29.5% stake.
The Vedanta group had earlier consolidated its businesses under Sesa Sterlite, merging Sterlite Industries (India) Ltd, and bringing stakes in other businesses such as Vedanta Aluminium Ltd and Cairn India Ltd under it. HZL is one big piece of the jigsaw that remains to be fitted in, as it is separately listed.
Sesa Sterlite is likely to be an aggressive bidder in the auction, assuming there is competition to buy the residual stake, and it has good reasons to do that. First, it has built HZL into a formidable firm in the lead and zinc industry, after acquiring a controlling stake through the government’s divestment process. Second, it wants to hold all its metals businesses in one company as that could yield cost savings and also allow one business to fund investments in another.
Lastly, it would like to get its hands on the â‚ą 24,095 crore cash on HZL books. Years ago, when it tried to use this money to acquire an international zinc firm, the government, in its role as a significant shareholder, nixed the plan.
The cash makes it easy to fund the acquisition too, assuming a merger happens. The value of the government’s 29.5% stake works out to ₹ 16,852 crore, much less than the cash it holds. Sesa Sterlite can easily pay a premium for that. But the real value in the longer run will be the recurring cash flows that will become available for Sesa Sterlite to exploit. If HZL remains a separate firm, it has to take arm’s length decisions as minority shareholders will want their interests to be protected.
Other investors who may bid in the auction do not have as much to gain from the stake sale. Their interest may also be tempered by the prospects of a merger. That could mean they are not buying into a stand-alone lead and zinc business, but instead are buying shares that could get exchanged with Sesa Sterlite’s shares at a later date, at a ratio to be determined at that stage. HZL shares closed up by 2% on Tuesday while Sesa Sterlite shares ended up by 1.56% on BSE.
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