Will cash-strapped govt accept Vedanta's sweetened offer for HZL, Balco?

Anil Agarwal’s Vedanta Resources has sought shareholder nod to extend the offer to acquire residual government stakes in Hindustan Zinc Limited and Balco.

The London-listed flagship company is making a fresh bid to acquire the government’s residual stakes in Hindustan Zinc Ltd (HZL) and Bharat Aluminium Company (Balco) for a combined sum of $3,482 million, valuing the deal at Rs 21,636.56 crore. The combined bid price for the stakes in the two companies has been tweaked taking into account the sharp fall in the value of the rupee against the dollar this year.

Vedanta shareholders will meet on October 30 to renew an enabling resolution that will allow the group comapnies to buy the remaining stake in HZL and Balco from government of India.

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The company had taken shareholders’ approval in August last year to raise the offer by up to 25%, which needed to be renewed after a year. But Vedanta did not seek renewal due to stalled talks and lack of clarity, following which the approval expired.

The London-listed mining conglomerate, which had acquired majority stake in Balco and Hindustan Zinc during 2001-2003, has now reportedly sweetened the initial offer by $40 million for buying majority stakes in both the companies, reported CNBC-TV18.

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The new offer for owning government’s 29.5 percent stake in Hindustan Zinc now stands at $3.48 billion and that for buying 49 percent stake in Balco stands at $487 million, sources told CNBC-TV18.

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According to Vedanta, the current offer price is assumed on the spot exchange for Indian rupee of 62.1383 against the US dollar. The rate is as on October 13.

At this rate, the overall offer for Hindustan Zinc and Balco would be more than Rs 24,800 crore.

In a letter to Vedanta shareholders, Agarwal said: “If the entirety of the government’s interest are acquired, the (Vedanta) group’s interests in HZL and Balco would increase to 94.4 per cent and 100 per cent, respectively, and Vedanta’s economic interests (in the two companies) would increase to 55 per cent and 58.3 per cent, respectively.”

According to the CNBC-TV18 report, the new offer is higher by 15% as compared to August 2012 spending limit and higher by 26% when compared to its offer to government in January 2012. Vedanta has reduced the valuation of Balco from $550 million last August to $487 million this time around.

The entire stake will be bought using internal cash accruals of group company Sesa Goa.

The bigger question, however, is whether the government will accept the offer

Till date, neither offer has been accepted by the government, which may determine to retain its interests or to seek to sell its interests to one or more third parties, the letter dated October 14 said.

Vedanta has been in talks with the government for more than two years now on acquiring remaining stakes in the two firms.

It currently holds 51% stake in Balco and 64.92% stake in Hindustan Zinc through its subsidiary Sterlite Industries .

Currently, Hindustan Zinc is the richest profit-making subsidiary of Vedanta with a cash and cash equivalent of Rs 22,365 crore as on June 2013.

Similarly, Balco - an unlisted company- had produced about 2,47,000 tonne of aluminium and had about 18% market share by production volume in the country in 2012-13.

It had reported a gross revenue of Rs 3,426 crore and profit after tax of Rs 37 crore during the last fiscal.

“The offer is 26.8% higher that the Jan 2012 offer. But it does have a lot of ‘Ifs’ and ‘Buts’ attached. The government will have to seek amendment to Mines and Minerals (Development & Regulation) Act, 1957 as per the advice of the Law Ministry before it proceeds on this path of divestment. Both HZL & Balco were nationalised under the Act of the Parliament in 1960s and hence amendments have to be made under the Act before residual stake process is completed,” the CNBC-TV18 report said.

According to market analyst, the government will now be happy to expedite the process of divesting their residual stake in HZL as well as in Balco.

“If one takes the approximate amount of Rs 173 per s hare which has been authorised by the Vedanta or the parent company, and presuming there is some negotiation for upward revision may be in the share price to about Rs 180 then in fact that looks to me the fair price. Because the cash lying in the books of the company of HZL, it is close to about Rs 55-60 per share, so, one should not feel that Vedanta is really offering a hefty amount of may be Rs 173 per share.. So, atleast we are reaching closer to the correct valuation. I think the government now will really be very happy to expedite this process of divesting their residual stake in HZL as well as in Balco,” he said in an interview with CNBC-TV18.