Govt may ask HZL to explore share swap,  rights  issues

Hindustan Zinc may have to explore alternative strategies other than handing out cash for the proposed $2.98 billion acquisition of Vedanta’s zinc assets

Mihir Mishra
Updated27 Feb 2023, 12:30 AM IST
The total debt was  <span class='webrupee'>₹</span>2,900 crore in the first half of FY23, mainly due to the strong cash flows on the back of supportive gross margins despite cost inflation
The total debt was ₹2,900 crore in the first half of FY23, mainly due to the strong cash flows on the back of supportive gross margins despite cost inflation

Hindustan Zinc Ltd (HZL) should explore alternative financial strategies other than handing out cash for the proposed $2.98 billion acquisition of Vedanta Ltd’s zinc assets, a government official aware of the plans said.

The government may ask HZL to consider share swaps, warrants or rights issues to purchase these assets rather than using cash reserves, the official said on condition of anonymity.

“We understand that the company needs to acquire mines to grow its business, but that should not be done through a cash acquisition. There are these options which the company can exercise. The government is a stakeholder in the company and has the right to cash reserves, and we will not let them use it for a related-party transaction,” the official said.

An India Ratings and Research report on 17 January said HZL had a net cash position, and its treasury book amounted to 17,800 crore in the first half of FY23. The total debt was 2,900 crore in the first half of FY23, mainly due to the strong cash flows on the back of supportive gross margins despite cost inflation.

On 19 January, the HZL board approved the acquisition of Zinc International assets of THL Zinc Ventures Ltd (Mauritius), a wholly owned subsidiary of Vedanta Ltd, through THL Zinc Ltd (Mauritius). THL Zinc will become a wholly owned subsidiary of HZL.

According to the Union mines ministry, the acquisition is a related party transaction and violates minority shareholder rights. Vedanta owns a 64.9% stake in HZL, while the government owns 29.5%.

The mines ministry has written to the market regulator reiterating its dissent to the deal and added that all three government representatives on the HZL board had opposed this proposal during the meeting.

HZL CEO Arun Misra said he has nothing more to add beyond the views he shared in a recent interview with Mint. In the interview, Misra said a company like HZL cannot limit its size and capacity to where it is today; it must grow much beyond and tap other mineral sources since mineral reserves in India and Southeast Asia—HZL’s key markets today—may exhaust. He also said HZL would discuss the mechanism with the government.

“The purpose (of this deal) is undoubted and indisputable. The mechanism can be the problem,” Misra said in the interview.

Misra had added that he had not discussed the issue with government officials yet but would do so soon.

The government has plans to sell its stake in HZL as part of its divestment plan.

Misra had said India’s annual zinc consumption is 650,000-680,000 tonnes and is expected to grow 3-4%. HZL produces about 800,000 tonnes annually. Hence, it needs new reserves to expand.

Analysts have also termed this acquisition ‘much needed’ but an expensive one.

“The company shall seek shareholder approval in February while other approvals are expected in 18 months,” a 19 January JM Financial Institutional Securities report, ‘Much Needed Growth Optionality, Albeit at Expensive Valuations’, had said.

“The acquisition is being undertaken for cash consideration not exceeding $3 billion, implying valuations of ~11x EV/ EBITDA (adj for 70% stake in Gamsberg - valuation could be 12-13x EV/ EBITDA). The acquisition will offer significant growth opportunity, given Zinc International’s capacity is expected to double by FY25 to 600kt (kilo tonnes) with another 300kt mine at Gamsberg and then rise to 1mt by FY27/28,” a note by JM Financial analysts Ashutosh Somani and Heet Vora said.

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First Published:27 Feb 2023, 12:30 AM IST
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