Vedanta Resources Plc (VED), a metals and oil producer, climbed to a 6-month high in London trading after announcing plans to combine its publicly traded Indian units into a new company to cut debt.
Vedanta rose as much as 4.3 percent to 1,564 pence, the highest intraday level since Aug. 4, and traded at 1,509 pence at 11 a.m. local time. Sesa Goa Ltd. (SESA), India’s biggest iron-ore exporter, will absorb Sterlite Industries (India) Ltd. (STLT) in an all-share deal, Vedanta said on Feb. 25. Investors will get three Sesa Goa shares for five shares of Sterlite.
Vedanta, which last year acquired a controlling stake in the oil producer Cairn India Ltd. (CAIR) for $8.67 billion, will transfer its 38.8 percent stake in the company, including a debt of $5.9 billion, to Sesa Sterlite, the new company that will hold 58.9 percent of Cairn India.
“Game-changing transaction is here,” Ash Lazenby, an analyst at Liberum Capital Ltd., said in a note. The plan is 12 percent earnings per share “accretive, debt fears resolved.”
Vedanta’s debt will fall 61 percent to $3.8 billion and the debt-service cost will be reduced by $300 million for the year ending March 31, 2013, the company said on Feb. 25.
The combined entity would have had $5.4 billion of earnings before interest, tax, devaluation and amortization in 2011 and $7.9 billion net debt, Lazenby said. That’s 1.5 times net debt to equity and “rating agencies should favor the new entity.”
The merged entity, in which Vedanta will hold a 58.3 percent stake, will help save $200 million annually, Navin Agarwal said on a conference call on Feb. 25. The merger will probably be completed this year, he said.
Sesa Goa shares skidded 10 percent to 203.85 rupees in Mumbai trading while Sterlite, India’s largest copper producer, fell 2.5 percent to 115.7 rupees.
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