A spate of acquisitions has extracted a toll on the Vedanta group, forcing it to opt for a restructuring to prevent a breach of its debt covenants. Debt covenants are agreements between a company and its creditors that the company should operate within certain limits.
Reports say that if commodity prices decline by 15 percent from the current level, there would be a big re-rating of the company's debt. Moody's had already downgraded the company's debt from Ba3 to Ba2 last month. Fearing further downgrades, at a time when the group needs more money from the market for expansion and completing the acquisition of Balco, the company is wisely going ahead with the restructuring.
According to initial reports, the London-listed Vedanta Resources plc will transfer its 38.8 percent stake in Cairn India to group company Sterlite. This means Sterlite will be servicing the debts taken by on Vedanta to acquire the stake from Cairn plc. Sterlite is down 4 percent on the bourses. Probably as asweetener and to fortify Sterlite's own balance-sheet, Sesa Goa is being merged with the former. Though, Sterlite still has a strong balance sheet with a favourable debt equity ratio, substantial portion of the earnings will now go in for debt servicing. One can however, expect higher dividends from Cairn and Sesa Goa.
This measure will, to some extent, reduce the $9 billion debt of the parent company. As per Vedanta's annual report, the company had a debt of $6.5 billion on March 31, 2011. The company had since 2008 made two big acquisitions, Sesa Goa and Cairn India.
Media reports point out out that Vedanta was considering a move to restructure its holdings in Sterlite Industries and Sesa Goa, potentially merging the two. It owns almost 55 percent of Sterlite and just over 55 percent of Sesa Goa.
Sesa Goa has a current market capitalisation of around Rs 21,441 crore and Sterlite Rs 43,158 crore.
According to aBusiness Standardreport, a share swap in the ratio of 2:3 is likely to take place. This means a shareholder will get two shares of Sterlite Industries for every three shares of Sesa Goa. However, this information is not confirmed.
If the merger is successful, Vedanta Resources will become a giant mining firm with the third-biggest profit in the private sector after ONGC and Reliance Industries.
The table shows that apart from the parent company, all other companies have a healthier balance-sheet. Not only is the debt-equity ratio better for all of them, but they are also sitting on a decent cash pile and generating good profits.
Restructuring of Vedanta plc will help the company to lighten its debt and again tap the market to raise $3 billion for the acquisition of Balco and expansion of existing capacities.
The news was well received in the UK markets, where Vedanta plc was lifter by nearly 6.5 percent on Tuesday.