In a sweeping shake-up, metals and energy major Vedanta on Friday announced plans to spin out its businesses into six listed entities, as it fights to stave off a debt crunch.
In a statement to the exchanges, the Anil Agarwal-promoted company said the board has approved the demerger of diversified businesses to unlock ‘significant value’. The pure-play, asset-owner business model will result in aluminium, oil and gas, power, steel and ferrous materials and base metals being demerged and listed separately, the regulatory filing said.
The demerger of the business is a vertical one. For every share of Vedanta, shareholders will receive one share of each of the five newly listed companies, the company said.
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The overhaul of the business is seen as a move to reduce the group’s multi-billion dollar debt load. Agarwal had indicated in late August that a break-up of the company into several entities was being contemplated so as to allow investors to bet on “pure plays”.
On Friday, he said in a release the demand for minerals, metals, oil and gas and power is expected to grow very rapidly and that Vedanta’s businesses are uniquely positioned to service this rising demand and reduce reliance on imports. “Vedanta is also foraying into semiconductors and display glass which are of great strategic significance to India,” Agarwal said.
The demerged entities will be called Vedanta Aluminium, Vedanta Oil & Gas, Vedanta Power, Vedanta Steel and Ferrous Materials, Vedanta Base Metals and Vedanta. The company said some of the “resulting companies” are in the process of incorporation.
While the Vedanta stock rose 6.8% on the BSE on Friday to close at `222.50, the Street has not been too enthused by the plans to split up the business. Analysts at Kotak Institutional Equities (KIE) wrote in early September, “The company is considering a separate listing of different businesses, which is unlikely to unlock much value, in our view. Divestment of other businesses or a further stake sale is last resort, with Vedanta and Vedanta Resources to address the FY2025E funding gap,” they noted.
Vedanta’s net debt to ebitda (excluding Hindustan Zinc) stood at around 3.3X at the end of March, 2023.VRL’s net debt at the end of March, 2023 was $12.7 billion and has been trying to bridge the funding gap with dividends, selling shares in Vedanta and brand fees. Until Friday, the Vedanta stock was trading at levels of `208, close to its 52-week lows.
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On Friday, S&P downgraded Vedanta Resources, the parent firm of Vedanta, to CCC on potential bond extensions and placed the company on “CreditWatch Negative”. “We believe the likelihood has increased that Vedanta Resources will undertake a liability management exercise that we could consider distressed under our criteria,” the ratings agency said. “This is particularly due to the proximity of January 2024 bond maturity of $1 billion, which is partially funded, “it said in a release. The agency noted that the “CreditWatch placement” reflects the likelihood of further rating downside over the next three months, especially if we considered the liability management exercise to be distressed. VRL is highly leveraged and the promoters have been trying to raise cash to pay off the debt.