Doubts persist on the benefits that will accrue to Sesa Goa from the merger with Sterlite Industries

Vedanta Group's proposed revamp elicited a mixed response from the investment community with concerns being raised about the benefits that would accrue to Sesa Goa from the merger with Sterlite Industries to form Sesa Sterlite. On Monday, Sesa Goa shares fell 10.45 per cent to close at Rs.203.6 while that of Sterlite 2.53 per cent to Rs.115.65.

Dipen Shah, Head-Fundamental Research, Kotak Securities, felt that there were no reasonable operational synergies visible in the merger and only limited financial and taxation synergies are likely. “The transaction will result in merging the considerably high and consistent cash burning Vedanta Aluminium (VAL) with good cash generating entities to meet VAL's ongoing funding requirements,” he said.

Sesa Goa would be paying about 11 per cent premium to acquire Cairn India from Vedanta Resources over its acquisition price for 20.1 per cent stake in Cairn India which nullifies the earlier stated gain to a large extent.

“We would turn positive on the transaction if Sesa Sterlite is able to buy out Indian government stake in Balco and Hindustan Zinc. The Sesa Goa stock fell on the back of the deal announcement on the above concerns and also the merger ratio was apparently favouring Sterlite.”

Jagdish Agarwal, Head, Research-Metals, Emkay Global Financial Services, felt that with VAL coming fully under the proposed merged entity, it had to take on VAL's debt of Rs.19,700 crore, too, adding a huge burden due to VAL's operational losses. With high costs of its existing operations, due to problems related to bauxite sourcing, there are doubts surrounding VAL's ability to turn around in the near future.

“The stake transfer of VAL (with an equity value of Rs.2,330 crore and huge net debt of Rs.19,700 crore), Cairn India (at Rs.390 per share against Vedanta's acquisition price of Rs.355 per share) and Malco (attributable stake in Sterlite valued at Rs.1,630 crore against Rs.1,440 crore at current market price) to Sesa Sterlite, it is definitely advantage Vedanta while it should be a concern for Sesa's minority shareholders,” he said.


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