Investors of Sterlite, Sesa Resist Merger

Vedanta Aluminium's debt pile, violations worry institutions Some shareholders of Sesa Goa and Sterlite Industries have opposed Anil Agarwal's plans to create a mining behemoth by combining the two companies with Vedanta Aluminium, a loss-making, debt-laden company struggling to build a controversial mining project in Odisha's tribal region.  Franklin Resources with 9.79%, Templeton Emerging Markets (2.44%) and Vanguard Group (1.46%) have told the management of Vedanta Resources they are uncomfortable with the transfer of . 48,500 crore of debt from the London-listed company to Sesa-Sterlite.  Last Saturday, Vedanta Resources announced that it will combine its two key listed companies in India with the privately held Vedanta Aluminium, creating a diversified metals and mining giant ranked seventh in the world on the basis of operating earnings. The combined unit will also be the third-biggest private sector company by profit in India after ONGC and Reliance Industries. Vedanta's stake in Cairn India and the debt taken on to buy the Indian exploration unit of the Edinburgh-based Cairn Plc will be transferred to the new company.  But what has irked shareholders is the transfer of debt amounting to . 48,500 crore. "They are mainly unhappy about the debt. The (Vedanta) management is talking to them on the matter and discussions are going on," one person privy to the development said.  The institutions did not respond to queries mailed by ET.  According to a senior group executive, some investors had questioned the company's ability to service the debt. "We have had regular discussions with them since Saturday and have explained to them the synergies of the structure. I don't see any issue now with the institutional shareholders," said the executive, who refused to be named as he is not authorised to speak to the media. Questions Raised Over $3-b Bond Issue Too  Questions were also asked about the $3.1 billion in bonds that Vedanta had issued for the Cairn acquisition. Since the bonds cannot be issued to a step down subsidiary, Sesa-Sterlite may be forced to pay Vedanta Resources $3.1 billion when the bonds come up for redemption.  Unhappy shareholders dumped stocks of both the companies on Monday, though the general weakness in equity markets due to the surging oil prices and fears of a war in the Middle East could also have contributed to much of the fall. Sesa Goa plunged 10% to . 203 while Sterlite Industries fell 2.5% to . 115.65. The Sensex slipped 2.6%. Under the terms of the merger plan, investors will get three shares of Sesa Goa for five shares held in Sterlite Industries. The merged entity will have a debt of $14 billion (about . 68,600 crore). "Vedanta Aluminium seems to be the main problem for the institutional shareholders. It has been a loss-making venture with no major turnaround in sight as it doesn't have a captive bauxite mine and has to buy (the key raw material) from the open market," said the person quoted earlier. A report by Kotak Institutional Equities was more scathing. "We value Vedanta Aluminium at EV (enterprise value) of . 90 billion (. 9,000 crore), lower than debt transfer of . 220 billion (. 22,000 crore) in this transaction. This results in negative equity value of . 131 billion, the cost of which will be borne by Sterlite and Sesa shareholders. Vedanta Resources shareholders (and promoters) have got a nice deal in the process," Kotak said in a note to clients. "Sesa shareholders also get a raw deal courtesy unfavorable valuation for VAL and we expect the stock to correct," it said. According to ET NOW, the business channel of this newspaper, Sesa Goa's institutional shareholders have demanded that Vedanta Resources forgo interest cost on the debt given to Vedanta Aluminium. The shareholders want Vedanta Resources to give the interest cost relief till Vedanta Aluminium gets access to captive bauxite mines.  Speaking to ET on Saturday, Vedanta Resources Chairman Anil Agarwal had said he was confident that government approval for a captive bauxite source would come soon. Finance Director Tarun Jain said the group would benefit from the low-cost greenfield aluminium unit that had cost about $6 billion, including the smelter, refinery and power plant. "A similar unit today would cost not less than $12 billion," he said.  A Deutsche Bank research report on Monday termed the transfer of ownership of Vedanta Aluminium to the new entity as 'disappointing'. "The key positive lies in the attempt toward untangling the group's complex corporate structure reducing the scope for future conflict between minority and majority shareholders," the report said.  Another area of concern is the environmental violations in Orissa. "Large foreign investors in Sesa Goa are very concerned with the image that Vedanta Aluminium has globally ," said another person aware of the development.  In 2010, the government clamped down on Vedanta Aluminium's mining venture in Niyamgiri, Odisha, citing environmental violations and dealing a major blow to Agarwal's plans of building an aluminium smelter.