Sesa Sterlite - Vedanta Group

The move is expected to cut costs, beef up cash flows and improve economies of scale

In a move aimed at simplifying and consolidating its business structure, the Vedanta Group on Saturday announced that its Indian subsidiaries Sterlite Industries and Sesa Goa would be merged into a single entity named Sesa Sterlite

 Creating a complex alloy 

The move, expected to cut costs, beef up cash flows and improve economies of scale, will create a company that is the seventh largest global diversified natural resources major in operating profit terms.

Sesa Sterlite will be listed in India with American Depositary Shares (ADS) listed on the New York Stock Exchange.

The transaction involves merger of Sterlite into Sesa Goa in the ratio of three shares of Sesa Goa, the country's largest iron ore exporter, for five Sterlite shares.

Unlisted company Vedanta Aluminium (VAL) and Madras Aluminium Company (Malco) will be 100 per cent consolidated into Sesa Sterlite. The transaction also involves transfer of Vedanta's direct holding of 38.8 per cent in Cairn India to Sesa Goa together with the debt of $5.9 billion, at cost. With a 20 per cent holding in Cairn already, Sesa Goa's stake will go to 58.9 per cent. The transaction is subject to regulatory and shareholder approvals.

The consolidation is expected to be earnings accretive for Sesa Goa, Sterlite and Vedanta shareholders immediately post completion. Post consolidation, Vedanta will own 58.3 per cent stake in Sesa Sterlite. Following the deal, Vedanta plc's debt service liability will reduce by 61 per cent from $9.65 billion to $3.8 billion.

Addressing the media, Anil Agarwal, Chairman, Vedanta, said, “significant synergies are expected from the move, resulting in cost savings of Rs.1,000 crore per annum. Sesa Sterlite will be one of the largest global diversified natural resources majors. The transaction is a natural evolution, leading to simplification of the Gorup's structure. Sesa Sterlite will be the principal operating company and the vehicle for future mergers and acquisitions in the group. We expect to close the transaction in 2012.”

However, the group's holding in Hindustan Zinc (HZ) and Bharat Aluminium Company (Balco), in which the government has a stake, will not be part of the merger. Sterlite, which is seeking to buy the government's remaining stake in HZL and Balco might complete the transaction this year, Mr. Agarwal said. Sterlite bought a majority stake in Balco in 2001 and in HZL in 2002.

Vedanta is seeking coal assets in Latin America. Vedanta Aluminium proposed to expand its alumina refinery in Orissa from one million to 6 million tonnes but this was rejected by a court. The smelter is running at 30 per cent capacity but the company will soon commission a 1.25 million tonne smelter and source bauxite from outside and from Balco. It already has in place a memorandum of understanding with Orissa Mining Corporation for 150 million tonnes and is in discussions with the Orissa government.