Vedanta merges Sterlite Industries and Sesa Goa

A bird flies by the Vedanta office building in Mumbai August 16, 2010.

MUMBAI (Reuters) - Vedanta Resources will simplify its business structure by merging its Indian subsidiaries Sterlite Industries and Sesa Goa into a single unit to cut costs and improve cashflows, the company said on Saturday as it looks to streamline a structure that has hurt its market valuations.

FTSE-100 miner Vedanta, which has underperformed the sector by more than 25 percent since the start of last year, has over a dozen units, none fully owned and several separately listed, producing oil to aluminium and copper to zinc.

The consolidation is expected to lead to significant synergies, including economies of scale, more efficient movement of group cash, improved allocation of capital and corporate cost savings including tax efficiencies, Vedanta said.

"The restructuring was necessary, especially after the acquisition of Cairn India, because it was a large acquisition and they needed to do things in a much more organised way in India," said Jagannadham Thunuguntla, head of research at SMC Investments and Advisors in New Delhi.

Vedanta said, as a first step, it will merge non-ferrous metals producer Sterlite Industries into sister concern and iron ore miner Sesa Goa.

The boards of the companies have approved the issue of three shares of Sesa Goa for every five shares held in Sterlite.

Its unlisted unit Vedanta Aluminium, along with Madras Aluminium Co, will then be transferred to the merged company, to be named Sesa Sterlite.

Vedanta's 38.8 percent holding in oil and gas producer Cairn India, which it acquired last year, will be transferred to Sesa Sterlite, along with related debt of $5.9 billion.

Sesa Goa already holds 20 percent in Cairn India directly.

"On the face of it, the merger ratio is appearing to be slightly negative to Sesa Goa shareholders and positive to Sterlite shareholders," Thunuguntla said. "...But on a long-term basis, this will prove to be positive for the merged entity."

The group's holding in Hindustan Zinc and Bharat Aluminium Co Ltd, in which the government also holds a part stake, will remain separate of the merger.

After the share transfer, Sesa Sterlite would be listed in India and also list American Depositary Shares in New York.

Vedanta, which will own 58.3 percent in Sesa Sterlite post-restructuring, now controls about 55 percent each in Sterlite Industries and Sesa Goa.

"This transaction is a natural evolution, leading to simplification of the Group's structure," Vedanta Chairman Anil Agarwal said in a statement. "Sesa Sterlite will be the principal operating company in the group... and is well placed to create value for all shareholders."

VALUE ACCRETIVE

This is the group's second effort to overhaul its structure. A similar exercise in 2008 was aborted after investor opposition to the plan and the valuations of some of Vedanta's African assets.

On Saturday, Vedanta sought to reassure its minority shareholders by saying the restructuring will be earnings-accretive in the first year itself.

The group expects cost savings of $200 million a year from the restructuring, vice chairman Navin Agarwal told analysts in a conference call, adding the transaction was expected to be earnings-accretive in the first year itself.

Vedanta held $9 billion in debt by December 2011 and serviced interest payments of about $500 million, but with the transfer of most of its debt to Sesa Sterlite, yearly debt servicing for the parent would fall to $180 million, Agarwal said.

Ratings agency Standard & Poor's said ahead of Saturday's announcement, the group's restructuring would improve its ability to service its debt obligations, but may take time to implement as it is subject to approval from a number of minority shareholders and regulators in Britain and India.

Vedanta expects to close the restructuring in 2012, Navin Agarwal said.

Cairn India, in which Vedanta acquired a majority stake late last year in an $8.7 billion deal, will remain separately listed, given the different valuation dynamics for oil and gas companies, its Managing Director Rahul Dhir said in the conference call.

The cash-rich company is likely to decide on a dividend and a one-time payout for shareholders within the next 2 to 3 months, he said.

Ahead of the announcement, shares in Sterlite, valued at $7.9 billion, closed 3.1 percent higher in a weak Mumbai market on Friday. Shares in Sesa, valued at $4 billion, closed down 0.2 percent.

Shares in Cairn India, valued at $14.8 billion, ended flat while Vedanta shares closed up 4.5 percent in London trading.

(Editing by Ron Popeski)