Resources conglomerate Vedanta, which faces bond redemptions exceeding $3 billion over the next 18 months at its UK-based holding company, Friday said it would demerge into six listed companies to undergird the valuations of its revenue streams as diverse as mining, energy, and non-ferrous metals.
Mumbai-listed Vedanta, which produces copper, aluminium, iron ore and crude oil, and is a subsidiary of the London-based Vedanta Resources (VRL), said the exercise was aimed at building a simplified corporate structure that would appeal to focused investors. Separate listed companies for each vertical should boost the valuations of revenue streams that typically have slightly different business cycles and competitive dynamics despite sharing the broader industry classification of commodities and natural resources.
To be sure, the demergers require regulatory and shareholder approvals.
Through this move, billionaire Anil Agarwal-led Vedanta will carve out five new listed companies with existing investors getting one share each in the newly listed companies for every share owned in Mumbai-listed Vedanta. In a similar move, Vedanta’s locally listed subsidiary Hindustan Zinc will also consider a similar split into three companies, the latter said in a separate regulatory filing.
“By demerging our business units, we believe that will unlock value and potential for faster growth in each vertical,” Anil Agarwal, chairman, Vedanta, said in a statement. “While they all come under the larger umbrella of natural resources, each has its own market, demand and supply trends, and potential to deploy technology to raise productivity.”
Shares of Vedanta surged 6.84% Friday to close at Rs 222.5 on the BSE. Hindustan Zinc shares gained 3.31% to close at Rs 308.8. The Sensex climbed 0.49%.
Last month, Twin Star Holdings, the majority shareholder among Vedanta’s promoters, sold a partial stake in the company through bulk deals, offloading 154 million shares, or a 4.14% stake, at a weighted average price of Rs 258 per share.
The stake sale, according to sources, was part of the group’s fundraising efforts to repay a part of the debt maturing early next year. ET reported on September 21 that Vedanta Resources is in advanced talks with global private credit funds to syndicate a $1-billion short-term loan to be used for part-paying $3.2 billion of bonds maturing in 2024 and 2025, two people in the know said.
Promoters currently own 68.11% stake in Vedanta as per the latest exchange data. Higher valuations would allow the promoters to realise better value for similar stake sales in the future.
The five new companies will be Vedanta Aluminium, Vedanta Oil & Gas, Vedanta Power, Vedanta Steel and Ferrous Materials, and Vedanta Base Metals. The demerger is expected to take between 12 and 15 months, depending on regulatory, shareholder and lender approvals.
Analysts, however, remained cautious about the implications while pointing to VRL’s precarious debt situation.
“Demergers like these generally add value for shareholders, but we would wait for more details,” said Ambareesh Baliga, an independent analyst.
The management, however, believes valuations have failed to reflect the true potential of each business stream as holding companies often trade at discounts.
“None of our businesses other than HZL are correctly valued. If you consider our current market capitalisation of $10 billion, our 65% stake in HZL only is worth that much,” Ajay Agarwal, President, Finance, Vedanta, told ET on Friday.
Rating Action
On Friday, the holding company’s credit rating was downgraded by S&P to CCC from B- over potential bond extensions. S&P also put the company on negative credit watch, which reflects a likelihood of further rating downside over the coming three months.
“We believe the likelihood has increased that Vedanta Resources will undertake a liability management exercise that we could consider distressed under our criteria,” S&P said in a statement Friday. “This is particularly due to the proximity of the January 2024 bond maturity of $1 billion, which is partially funded.”
Earlier this week, Moody’s Investors Services had downgraded Vedanta Resources one notch while maintaining its negative outlook.
Following the demerger, Vedanta will continue to hold a stake in Hindustan Zinc and will turn into an incubator for the group, housing new businesses such as display and semiconductor manufacturing. A similar structure is followed by the Adani Group, where all listed entities have been demerged out of flagship Adani Enterprises, which acts as an incubator for the group.
The debt of the company will be distributed among the six listed companies based on their assets and capabilities, Vedanta’s Ajay Agarwal said.
Source: Economic Times