London: Investors welcomed London-listed miner Vedanta's plan to streamline its structure, improve access to cash and reduce debt, saying the pressure is now on the company to implement the plan after a similar exercise failed more than three years ago.
Shares in the India-focused miner, boosted last week by hopes of an imminent announcement of the restructuring, have underperformed the British mining sector index by about 25 per cent since the start of last year, in part because of its web of subsidiaries and a heavy debt burden.
Vedanta said on Saturday it would take the first steps to eliminate cross holdings by merging base metals producer Sterlite Industries into iron ore miner Sesa Goa to create Sesa Sterlite, an umbrella unit for others.
Sesa Sterlite, which would be 58 per cent owned by Vedanta, would be Vedanta's main operating subsidiary, eventually holding all its producing assets from oil and gas to power and aluminium. The only other remaining subsidiary directly owned by Vedanta would be Konkola Copper Mines, its Zambian operation.
"We are supportive. The problem is they have got to get it through (shareholders in Sesa and Sterlite)," said one top 10 shareholder, who could not be named due to company policy.
"Compared to the last abortive (attempt) they have thought this through in a lot more detail and it has been approved by the boards. So it is going to take a while, but I think they have got a good chance," the shareholder said. "The main risk is executing."
Vedanta was forced to scrap a similar exercise in 2008 after investors opposed the idea and as the broader market headed into a tailspin. The miner says it has had a positive response from minority shareholders so far, but shares in Sesa were down over 10 per cent on Monday and Sterlite shares ended 2.5 per cent lower, while analysts expressed doubts over the deal.
"The proposed group restructure would mean a wider business profile for Sesa Goa shareholders, but at a huge cost, in our view," analysts at RBS said, highlighting what they said was an unfavourable merger ratio.
Another potential sticking point for Sesa Goa and Sterlite shareholders is the merger of Vedanta's loss-making and debt-burdened Vedanta Aluminium (VAL) unit into Sesa Sterlite -- in exchange for shares worth 2.4 per cent of the merged entity -- at a valuation level questioned by some analysts who say assumptions on production and supply are too optimistic.
Moody's said in a statement affirming Vedanta's Ba1 credit rating and a negative outlook that market conditions for this planned overhaul were more clement than in 2008, but the rating agency said it did not "underestimate the challenges and time required to obtain the agreements and approvals" needed.
Vedanta's shares were down 1.6 per cent at 1,476 pence by 1620 GMT on Monday, with analysts noting that the price had already risen 14 per cent last week ahead of Saturday's announcement, and is up 38 per cent so far this year.
"It looks more attractive going forward with a simplified structure -- it was overly convoluted," analyst Gavin Wood at Panmure Gordon in London said, but he cautioned the limited synergies were unlikely to prompt a new rush for the shares.
Vedanta's decision to place its directly owned stake in Cairn India into the newly merged operating subsidiary has meant it can pass down associated debt -- $5.9 billion in bonds and loans taken on during the $8.7 billion all-cash deal -- and slash its crippling interest repayments.
The shift of holding-level debt down to subsidiaries will also help avoid the risk of Vedanta breaching debt covenants if commodity prices drop and its key ratios suffer. Gross debt will drop to $3.8 billion from $9.7 billion.
"Should the deal complete, Vedanta has solved the top two issues pinning back shares: a complex corporate structure causing value leakage with cross holdings raising corporate governance concerns, and the ability to service PLC debt," Liberum analysts said in a note.
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