The complex restructuring exercise announced by the Vedanta group appears to be intended to achieve two objectives.
One, reducing the debt burden on Vedanta Resources' own balance sheet. Two, bringing together the capital and cash holdings of Indian subsidiaries such as Sterlite Industries, Sesa Goa and their subsidiaries so that they can take on this additional debt.
As part of the deal, Vedanta Resources will transfer its 70 per cent stake in Vedanta Aluminium, 95 per cent holdings in Madras Aluminium Company (MALCO) and its 38.8 per cent stake in Cairn India to a new merged entity. This entity, created through the merger of India-listed Sterlite Industries and Sesa Goa will be called Sesa Sterlite.
Sesa Sterlite will pay Vedanta a total sum of Rs 1,641 crore and Rs 1,786 crore for its stakes in Vedanta Aluminium and MALCO respectively in the form of shares in the new entity.
The Cairn India stake is being transferred for $1, but comes with an onerous debt burden of Rs 29,000 crore ($5.9 billion) which will now reside in the Sesa Sterlite balance sheet. As of September 2011, Vedanta Resources had $2.9 billion outstanding in bonds and another $3.1 billion due in the form of convertible instruments. However, repayment isn't imminent with the bonds redeemable in tranches from early 2014 to early 2021.
Now, why did the Vedanta group decide to merge Sesa Goa and Sterlite into one conglomerate while deciding to do this deal?
The reasons could lie in the individual financial positions of the two companies. Neither may have been able to handle the large Cairn related debt burden on their own. Take Sesa Goa. It had a net worth of Rs 12,810 crore as of March 31, 2011 with debt of about Rs 4,400 crore.
With the ban on iron ore mining in Karnataka, a higher export duty impost and falling iron ore realisations, cash flows have been under pressure.
Sterlite Industries was better placed with about Rs 44,000 crore of networth and Rs 15,000 crore of debt. But with capital intensive forays into energy and aluminium expansion, it may have limited room to take on additional debt.
adarsh@thehindu.co.in