The new structure is vastly cleaner and the elimination of cross-holdings with improved cash fungibility is positive for

the new formed entity. According to the deal, Vedanta Aluminium along with the Madras Aluminium Company will also be consolidated into Sesa Sterlite. "Vedanta will also transfer its 38.8% holding in Cairn India to Sesa Sterlite. The parent company's debt will thus be lowered by 61% and Sesa Sterlite will take on debt of $5.9 billion," said an ET report. Vedanta's holding in the new entity Sesa Sterlite will be 58.3%, at a similar level to its 58.0% holding in Sterlite and 55.1% in Sesa currently. Shares of Sesa Goa fell more than 10% in trade on Monday on the merger plan. According to experts, the fall in the stock price is largely on account of swap ration and debt overhang on Sesa Goa. "Fall in the stocks is because of the swap ratio adjustment. Here, the fall is steep for Sesa Goa because it is adjusting to the new share swap ratio," said Ashika Stock Brokers Research Head Paras Bothra. Shareholders of Sterlite will get three shares of Sesa Goa for every five shares held, as per the swap ratio fixed. Eventually, they will become shareholders of Sesa Sterlite to be listed on bourses, after receiving regulatory approvals, including that of shareholders of the concerned companies. "This said proposal will not give any capital appreciation to the investors in the short term. However, the entire merger is going to reward the shareholders after a long time because the units to be transferred in this company say aluminium and power, both are capital intensive industry and they have a long gestation period," said KR Choksey, Chairman, KR Choksey Securities. "Share swap ratio of 0.6x is fair given both past price patterns and our pre-deal fair values for the two companies. Based on the last closing prices of stocks, the ratio is slightly favourable for Sterlite," CLSA said in a report. According to analysts, Vedanta Resources will greatly benefit from the numerous synergies this restructuring would bring to the company over the years. However, shareholders of Sesa Goa will have little to cheer as the debt of the newly-formed entity Sesa Sterlite will be about 14 times the current debt of Sesa Goa. "Since the Cairn acquisition debt of US$ 5.9 billion is to move to Sesa Sterlite, Vedanta's debt service liability would reduce 61 per cent to US$3.8bn (from US$9.7bn). As per the management estimates, debt service cost at Vedanta Plc would fall by US$300m to US$180m in FY13. It would also result in a significant extension of debt maturity profile for Vedanta," said a Barclays Capital Equity Research report. Ads by Google

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Brokerage Calls: Deutsche Bank: Sesa Goa downgraded to 'Hold' by Deutsche Bank Deutsche Bank has downgraded Sesa Goa to 'hold' from 'buy' after the restructuring announcement and also cut target price to Rs 249 from Rs 270. "... Transfer of the ownership of loss-making Vedanta Aluminum to the newly-created Indian entity is disappointing," the bank said in a note. It also said swap ratio for the merger of Sterlite Industries and Sesa Goa appears favourable for Sterlite shareholders. CLSA: Upgrade Sesa Goa to underperform from 'Sell' Our new valuation of Sesa Goa post restructuring is Rs 230, implying a value leakage of Rs15/share. The new Sesa Sterlite standalone entity should benefit from tax efficiencies across profit-making iron ore/copper businesses and loss-making VAL/SEL. We see a 9-19% EPS dilution for Sesa over FY13-14. In FY15, we see an EPS accretion of 22% as our iron ore profits fall sharply in FY15 due to lower ore prices. We maintain 'Outperform' on Sterlite Industries with a target price at Rs138 for Sterlite, implying 16% upside. Macquaries: Buy on dips recommended for Sterlite Industries Investors may find it tough to believe that the restructuring would not hurt minority shareholders. But our analysis does indicate undervaluation for Sterlite. In particular, we would buy on any dips. The 12-month target price for Sterlite Industries is Rs 149. Sesa Goa is trading at low valuations, driven by the holding company discount for its 20% holding in Cairn India. This holding company discount would narrow down under the merged entity as the holding in Cairn India would rise to 58.5%. Barclays Capital: Underweight on Sesa Goa Barclays Capital is 'Under-Weight' on Sesa Goa and has a price target of Rs 176 per share.

Vedanta Resources PLC on the Saturday announced the merger of all its key investments in India into a single company called 'Sesa Sterlite'. The new holding company will own controlling stakes in all of Vedanta's companies in India and would be a metals, mining and natural resources giant. The merged entity would be Indias natural resources company and is expected to be seventh largest global diversified natural resources major on EBITDA basis. By this exercise, the group structure has also been simplified and cross holdings have been eliminated, which is expected to benefit the group through superior capital structure, increased flexibility to allocate capital, broader access to capital markets and enhanced visibility of earnings and cash-flow. In addition to this, increased diversification is expected to reduce volatility of earnings through commodity cycles, lowering the cost of capital and enhancing value. As per the management, the transaction is expected to be completed in CY12 and the synergies are expected to generate cost savings of Rs10bn per annum.

Restructuring done to lighten up Vedanta Plc balance sheet We believe that restructuring has been done largely to lighten the parent companys balance sheet, bring in synergies between VAL and Sterlite Energy (SEL), use the accumulated losses at VAL and reduce the financing costs for the company. Vendanta Resources Plc, the parent company had taken loan to the tune of US$2.8bn to acquire stake in Cairn India, which was to be repaid over the next two years. In addition to this, the parent company had to infuse equity in its loss making subsidiary VAL to fund its capex. Sterlite, 29.5% stake holder, had invested more capital in VAL than its equity contribution over the last two years.
Sterlite to witness buying The merger ratio would boost Sterlites stock in the near term as it is done at a premium to Fridays closing of Rs119. On the other hand, we expect it to be negative for Sesa Goa as the debt of VAL would be shared on its books. We believe the deal is largely done in a fair way except the valuation of VAL. The merged company would be a must own entity as it would provide a large diversified portfolio under one roof. We value the merged entity Sesa Sterlite on sum-of-the-parts method. We have used EV/EBIDTA method to value the metal assets, price/book for the power and a holding company discount to Cairn India. We derive a target price of Rs217 per share for Sesa Sterlite (and Sesa Goa) which on an implied basis (swap ratio of 0.6x as per deal) indicates a target price of Rs130 for Sterlite. We maintain our Market Performer rating on Sesa Goa and our BUY rating on Sterlite. Transaction completion timelines
Events BSE and NSE approval sought Competition Commission approval sought Foreign Investment Promotion Board approval sought BSE and NSE approval Vedanta posting of UK circular Competition Commission approval Application to High Court in India and Supreme Court of Mauritius Vedanta EGM Scheme documents posted to shareholders Sesa / Sterlite / MALCO EGM Foreign Investment Promotion Board approval High Court of India and Supreme Court of Mauritius approval Other required approvals Transaction completion Source: Company Expected date Mar-12 Mar-12 Mar-12 Apr-12 Apr-12 Apr-12 Apr-12 May-12 May-12 Jun-12 Jun-12 Sep-12 CY 2012 CY 2012

Restructuring exercise

The restructuring exercise includes merger of four companies viz Sterlite Industries, Sesa Goa, Vedanta Alumina and MALCO and transfer of Vedantas stake in Cairn India to the merged entity with an associated debt. The steps for the proposed transaction are:

1. Sterlite will merge into Sesa Goa to create Sesa Sterlite, through the issue of Sesa Goa shares to shareholders of Sterlite. Sterlite shareholders as of the record date are expected to receive 3 Sesa Goa shares for every 5 existing Sterlite shares. Sesa Goa also intends to establish an ADS facility comparable to Sterlites current ADS. This would allow holders of Sterlites ADS as of the record date to receive Sesa Goa ADS with appropriate adjustments to reflect the foregoing exchange ratio. Each Sterlite ADS currently represents four equity shares of Sterlite. 2. Consolidation of VAL, via the merger of Ekaterina Limited (a Mauritius holding company for Vedantas 70.5% shareholding in VAL) into Sesa Sterlite and the issue of 72.3mn Sesa Goa shares to Vedanta after obtaining all necessary approvals. Based on Sesa Goas closing price on 24 Feb 12 of Rs227/share, the equity value of VAL equates to Rs23.32bn (US$473mn). 3. MALCO to merge into Sesa Sterlite, through the issue of 78.7mn Sesa Goa shares to shareholders of MALCO as of the record date. Based on Sesa Goas closing price on on 24 Feb 12 of Rs227/share the value of MALCO equates to Rs17.9bn (US$363mn) including the value of MALCOs existing 3.6% shareholding in Sterlite. As part of the merger MALCOs existing shareholding in Sterlite will be cancelled by Sesa Sterlite. 4. Post the merger of Sesa Goa and Sterlite, Sterlite Energy Limited and VALs Aluminium business will be merged into the consolidated Sesa Sterlite. As wholly-owned subsidiaries no shares will be issued in consideration of the mergers. 5. Vedanta will transfer its 38.8% direct shareholding in Cairn India to a wholly-owned subsidiary of Sesa Goa at a nominal consideration of US$1, together with the associated acquisition debt of $5.9bn (coupon of 5.2%). The debt will continue to be guaranteed by Vedanta. This transfer is not inter-conditional on the merger of Sesa, Sterlite, MALCO and VAL. Positives of the deal:

Consolidated balance sheet to be stronger and would reduce the cost of funds for the companies. Increased diversification is expected to reduce volatility of earnings through commodity cycles, lowering the cost of capital and would enhance value. Accumulated loss of Rs15bn at VAL would reduce the tax out flow for the group. Overhang of merger of VAL with Sterlite is over. With the merger of SEL and VAL aluminium, the capex for VALs power plants would reduce. Shareholders of Cairn India and HZL would receive higher dividend over the next two years as the merged entity has high debt repayment. Positive for Sterlite shareholders in the near term as the deal is done at a premium to Fridays closing price of Rs119.

Negatives of the deal:

We believe the valuation of VAL is on the higher side considering the company has been loss making and we do not expect it to turn green over the next 1-2 years. Due to lack of raw material integration, the cost of producing aluminium is quite high and this would

continue until any new resource is allocated to the company. The management indicated that the valuation was done on a DCF basis on their assumption that they would be allocated raw material resources over the next 2-3 years. In the process of the restructuring, Sterlites inter-corporate loan of Rs10bn has not been mentioned. We believe the merger of VAL and SEL into Sesa-Sterlite would lead to SEL supplying power to VALs expanded aluminium capacity. VAL is raising its aluminium smelting capacity from 0.5mtpa to 1.25mtpa in the next one year. We believe power required for this would be met by SEL and would restrict the upside from its merchant power capacity. Consolidated entity would have to refinance its debt transferred from Vedanta, as its cash flow would be lower than the debt servicing required over the next two years. The debt taken for the acquisition of Cairn has to be repaid over the next two years and cash flow from operations is expected to be lower than the repayment.