Sucheta Dalal :Sterlite Mergers: Another self-serving move?
Sucheta Dalal

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Sterlite Mergers: Another self-serving move?  

March 6, 2012

It was perplexing that a company, listed in London, would spend so much money to broadcast its CSR activities on prime time TV. The truth was evident a few weeks later. Once again, Anil Agarwal’s corporate empire was attempting to push through a self-serving restructuring process

Sucheta Dalal

If you have no truck with business news, you would be forgiven for thinking that Vedanta was a large NGO involved only in improving people’s lives through education and midday meals programmes for India’s rural poor. For others, it was perplexing that a company, listed in London, would spend so much money to broadcast its CSR (corporate social responsibility) activities on prime time TV. The truth was evident a few weeks later. Once again, Anil Agarwal’s corporate empire was attempting to push through a self-serving restructuring process.

The television advertisements clearly served two purposes—it muted mainstream media’s criticism of its anti-Indian shareholder structuring and drew attention away from the high-profile protest against its human rights violations (by NGOs like Amnesty International) and environmental degradation. What did Vedanta announce after this TV build-up? Here is what InGovern, a Bengaluru-based proxy advisory firm says: Sterlite Industries and Sesa Goa will merge to form Sesa Sterlite. Sterlite shareholders will get three shares of Sesa Goa for every five shares held. Vedanta Resources Plc will transfer its 38.8% shareholding in Cairn India to Sesa Sterlite for $1 along with a massive $5.9 billion of debt. Vedanta will also transfer its 70.5% shareholding in Vedanta Aluminium (VAL) valued at Rs2,332 crore to Sesa Goa for new 7.2 crore shares of Sesa. Since Sterlite owns the remaining 29.5% of VAL, the merged Sesa Sterlite will own 100% of VAL. Vedanta will further transfer its 94.8% shareholding in MALCO or the Madras Aluminium Company Ltd (which, in turn, holds 3.6% of Sterlite) to Sesa for new shares of Sesa Goa.

In effect, Sesa Sterlite will be saddled with $5.9 billion of Vedanta’s debt in exchange for shares of Cairn India. All the risks associated with VAL will also move from Vedanta Resources Plc to Sesa Sterlite “probably without being adequately compensated” for this. As one analysis says, “the transaction will result in merging the considerably high and consistently cash burning VAL with good cash generating entities to meet VAL’s ongoing funding requirements.”

Will the restructuring go through? Most likely. The promoter group holds 58% of Sterlite and 55% of Sesa Goa. Institutional shareholders (mainly foreign institutions) hold 21% and 30%, respectively, in the two companies and will play a key role. Opaque Indian rules make it difficult to tell whether there is concentrated beneficial ownership behind this substantial foreign institutional ownership.

At this juncture, it is important to look at a brief history of Sterlite over the past two decades. After a failed effort to get the late Harshad Mehta to ramp up its share price (a comeback attempt for Harshad), Sterlite tried to de-list its shares from the bourses by arm-twisting investors into accepting cheques mailed to them with a paltry offer of Rs150 per share which was half its then book value, that too part cash (Rs100) and part non-convertible debentures (Rs50). It also tried to get the depository to automatically sweep shares out of investors’ demat accounts if they banked the cheques. Trading in the shares was resumed after a long gap and litigation in 2002 following angry protests by investors and intervention by the market regulator. This time, one is willing to bet that there will be no protests. In the decade after the last episode, investor activism is virtually non-existent and the retail investor population has shrunk considerably. More importantly, independent NGOs working for investor protection simply do not have the financial muscle to fight a legal battle against large corporates and both the regulator and the institutional investors act selectively.

 


-- Sucheta Dalal



 



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