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Investors See Risk To Vedanta Shake-Up Plan
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Shares in the FTSE 100 diversified miner, boosted last week by hopes of an imminent announcement, have underperformed the British sector by about 25 percent since the start of last year, in part because of its web of subsidiaries and heavy debt burden.
Vedanta said on Saturday it would take the first steps to eliminate cross holdings by merging base metals producer Sterlite Industries into iron ore miner Sesa Goa to create Sesa Sterlite, an eventual umbrella unit for others.
Sesa Sterlite, which would be 58 per cent owned by Vedanta, would be Vedanta's main operating subsidiary, holding all its producing assets from oil and gas to power and aluminium. The only other remaining subsidiary directly owned by Vedanta would be Konkola Copper Mines, its Zambian operation.
"We are supportive. The problem is they have got to get it through (shareholders in Sesa and Sterlite)," said one top 10 shareholder, who could not be named due to company policy.
Vedanta was forced to scrap a similar exercise in 2008 after investors in separately listed subsidiaries opposed the plan. The miner says it has had a positive response from minority shareholders so far, but shares in Sesa were down over 10 percent on Monday while Sterlite shares ended 2.5 percent lower.
"Compared to the last abortive (attempt) they have thought this through in a lot more detail and it has been approved by the boards, so it is going to take a while. But I think they have got a good chance," the shareholder said. "The main risk is executing ... it is going to take six months to get it all done, but I think it is a good deal."
Following the weekend announcement, Vedanta shares were up 0.7 percent at 1,509 pence around 1323 GMT, paring earlier gains but outperforming a 1.1 percent drop in the sector. Analysts said much of the immediate uplift from the deal had already been priced in last week.
"Should the deal complete, Vedanta has solved the top two issues pinning back shares: a complex corporate structure causing value leakage with cross holdings raising corporate governance concerns, and the ability to service PLC debt," Liberum analysts said in a note.
Vedanta's decision to place its directly owned stake in Cairn India into the newly merged operating subsidiary has meant it can pass down associated debt -- $5.9 billion in bonds and loans acquired during the $8.7 billion all-cash deal -- and slash its crippling interest repayments.
The shift of group debt down to subsidiaries will also help avoid the risk of Vedanta breaching debt covenants if commodity prices drop. Gross debt will drop to $3.8 billion from $9.7 billion.