Vedanta Limited, which is owned by billionaire Anil Agarwal, unveiled a significant development on September 29. The company announced its plan to establish separate verticals by demerging its various entities, including its metal, power, aluminum, and oil and gas businesses. This strategic move is aimed at unlocking the inherent value within these businesses.
Vedanta Ltd. has given its approval for the demerger of its diverse business operations, aiming to create substantial value for its shareholders. As a result of this decision, six distinct companies will emerge, and each of them will go public through listing.
The six autonomous companies
The six autonomous companies that will be publicly listed are as follows: Vedanta Aluminium, Vedanta Oil & Gas, Vedanta Power, Vedanta Steel and Ferrous Materials, Vedanta Base Metals, and Vedanta Ltd.
The demerger strategy employed by Vedanta is designed as a vertical separation. Shareholders of Vedanta Ltd. will receive one share in each of the five newly established entities for every share they currently hold in the existing listed company.
The objective behind this action is to streamline Vedanta’s corporate framework by creating independent businesses focused on specific sectors. Additionally, it presents an opportunity for global investors, encompassing sovereign wealth funds, retail investors, and strategic investors.
Pending necessary approvals, the entire transition is anticipated to be finalized by the fiscal year 2025.
Here’s the breakdown of each company’s composition:
Vedanta Aluminium: It will possess the largest capacity in India with its captive power facilities and an alumina refinery. This business will also retain ownership of coal and bauxite mines, including the 51 percent stake in BALCO.
Vedanta Power: It is set to become one of India’s most prominent private-sector power generation companies.
Vedanta Base Metals: This entity will have a diversified portfolio of international base metal assets, including assets in Tuticorin, Fujairah Gold, Silvassa, and VZL.
Vedanta Oil & Gas: This segment will encompass the Cairn business, establishing itself as India’s largest private-sector crude oil producer.
Vedanta Steel & Ferrous: It will emerge as one of India’s major private sector exporters of iron ore, incorporating Sesa Iron Ore, Sesa Coke, WCL (Liberia), and a 95.95 percent stake in Electrosteel Steel.
Vedanta Ltd.: This is the existing listed entity, responsible for the manufacturing of LCD and Display glass, the semiconductor business, the stainless business, and holding the stake in Hindustan Zinc.
Vedanta Chairman Anil Agarwal expressed, “By demerging our business units, we believe we will unlock value and potential for faster growth in each vertical.”
The entire restructuring process is anticipated to span 12-15 months.
On a notable development, Vedanta’s stock saw a 7 percent increase on a single day in 2023, marking its best performance for the year.
Earlier in the day, Vedanta’s subsidiary Hindustan Zinc announced its authorization for a committee of directors to assess an appropriate corporate restructuring exercise aimed at unlocking shareholder value. Vedanta currently holds a 64.92 percent stake in Hindustan Zinc, as reported in the June quarter shareholding pattern. Market expert Prakash Diwan described the move as bold and ambitious, potentially unlocking significant value and offering an opportunity to divest from non-core sectors like iron and steel.This move also presents fundraising opportunities for the parent company, aiding in meeting upcoming debt obligations. Diwan emphasized that the concern over debt is more prominent in FY25 than in FY24.
Rakesh Arora of Goindiastocks.Com, however, noted that while the restructuring benefits promoters, it may not offer substantial advantages to retail shareholders. He suggested that distributing Hindustan Zinc stock to shareholders would have unlocked more value, but since Hindustan Zinc is now integrated into Vedanta Limited, this potential value unlock for retail shareholders is limited.
Vedanta’s shares previously dipped to a 31-month low following a downgrade of certain bonds issued by its parent company, Vedanta Resources Ltd., and its wholly-owned subsidiaries by Moody’s Investors Service. The parent company faces the repayment of notes worth nearly $2 billion in the financial year 2025. Including these bonds, the company is confronted with debt repayment obligations totaling $3.6 billion in the upcoming financial year, according to Kotak Institutional Equities.
During a conference call that followed the announcement of the demerger, Vedanta’s management elaborated on the rationale behind this strategic move, the dividend policy, and the allocation of debt for the newly created entities.
The primary objective of the restructuring is to attract strategic investors. Vedanta’s motivation for the demerger is to simplify its corporate structure and offer direct investment opportunities to global investors. The management expressed that after the demerger, each independent entity will have greater autonomy to realize its full potential and inherent value through independent management, capital allocation, and specialized growth strategies. This approach is expected to broaden the investor base for Vedanta’s assets, providing both global and Indian investors with the opportunity to invest in their preferred sectors.
Regarding debt allocation
Regarding debt allocation, the management stated that it will adhere to the guidelines outlined in the Companies Act for distributing debt among the demerged entities.
In the context of pledged shares, the management clarified that any restructuring involving pledged shares in Vedanta and Hindustan Zinc would require approval from lenders. However, they indicated that obtaining this approval should not be a cumbersome process, suggesting that the status of pledged shares is unlikely to change significantly.
Additionally, the management emphasized that the demerger would not affect cash flow. They regarded the transaction as credit-enhancing and clarified that there would be no alterations in cash flow, dividends, or any other financial aspects.
In terms of the dividend policy, the management stated, “Each company will assess the existing dividend policy, and if it aligns with the specific company’s objectives, the board will make a corresponding decision.”
