Vedanta wants to delist at cyclical lows, but investors may not budge

Vedanta Resources Ltd has the proposed delisting of India-listed Vedanta Ltd at an opportune moment. Reflecting the decadal low commodity prices, Vedanta Ltd’s stock price has dropped to about half its levels in January and is close to its multi-year lows.

But given that the intrinsic valuation of the stock is higher, investors may not bite the bullet, analysts say.

The delisting ball has been set in motion through a reverse book-building process to acquire the roughly 50% minority shareholding in Vedanta and delist the scrip.

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Note that parent company, Vedanta Resources has considerable debt on its books to the tune of $7 billion and depends on dividend pay outs from its India-listed arm to service debt. But if it manages to pull off the minority acquisition, the extra dividends it will get through the process will easily pay for the additional debt required for the deal.

Of course, from a minority shareholder’s perspective, that would mean giving up on a handsome dividend yield. They are unlikely to budge unless the offer is raised substantially.

“We expect the reverse book build derived threshold price will be at a significant premium to the offer price. Successful past delisting offers have seen an average premium of 53% over the floor price...minorities would be better off seeking an exit closer to our target price ( ₹162),” said analysts at Investec Securities in a note to clients.

Vedanta Resources’ offer price currently stands at ₹87.9 per share.

“Vedanta Resources is dependent on dividends from Vedanta to fund its interest obligations but principle repayment has been their key concern. Upstreaming funds through dividends have multiple leakages from promoters’ perspective given 50% minority in Vedanta Ltd and 35% minority in Hindustan Zinc Ltd,” said analysts at Kotak Institutional Equities in a note to clients.

As such, the deal makes sense for the parent company to garner a larger share of dividends from its operating companies. Apart from the high dividend yield, minority shareholders will also point out through their bids in the reverse book building process that the firm’s intrinsic value is markedly higher. The current pandemic may impact Ebitda for FY21, but it is expected to normalize in FY22 once the pandemic is behind, analysts say.

“We believe the stock has been trading at a discount to the intrinsic value of the company’s resources and assets, or replacement value. In delisting, minority shareholders expect the offer price to be closer to the replacement value, or significantly higher than the ruling price. The success of the offer would depend on how wide a gap this is and on the promoter’s willingness to bridge it,” said analysts at Kotak in a note to clients.