New Delhi, June 10 (IANS) Proxy advisory firm, Institutional Investor Advisory Services (IIAS) has put out an advisory to support Vedanta''s delisting proposal but called it as "opportunistic" and the base price low, commenting that Vedanta''s independent directors should have called for an independent valuation and guided shareholders on pricing.
"We believe the delisting, at this time, is opportunistic at the time of the announcement, the company''s stock price was closer to its 52-week low, tempered by the fallout of the current economic environment and the impact of the Covid-19 crisis on equity markets," IIAS said in the advisory.
The base price at which the reverse book-building commences for the promoters to accept tendered shares, set at Rs 87.50 (marginally higher than the floor price of Rs. 87.25 calculated based on regulatory requirements), is low, it said.
"We believe Vedanta Ltd''s Independent Directors should have commissioned an independent valuation of the business and guided shareholders by providing a price range for the delisting price," IIAS added.
"Even so, we support the delisting because the regulations protect minority shareholders by allowing them to set the delisting price through a reverse book building process," IIAS said.
IIAS believes the compulsions of having better financial flexibility to support group debt at the promoter level is a key driver of Vedanta''s delisting.
It said the group has funded almost all its recent corporate actions using debt. The acquisition of a stake in Anglo American and the delisting of VRL all resulted increasing debt at the holding company level.
The aggregate debt across the group (Vedanta, VRL and other holding companies) is estimated at $17 bn in March 2021. Repayment pressures on the group are also high - around $1.9 bn will need to be refinanced by September 2021, which includes a $670 mn bond due in June 2021.
Cash generation for the group is through the operating subsidiaries, Vedanta and its 64.92 per cent subsidiary Hindustan Zinc Ltd (HZL) which are listed and limits the promoters'' access to that cash, it said.
Vedanta Ltd, on March 31, 2020, reported cash balance of about $5 bn. HZL, on May 12 (the day VRL proposed the delisting), announced an interim dividend of Rs 16.50 per share. Vedanta''s share of HZL''s FY20 dividend aggregates $603 mn (Rs 4.53 bn), which should be distributed to Vedanta''s shareholders, according to Vedanta''s dividend distribution policy.
However, Vedanta has decided not to declare a final dividend in FY20 (after its Rs 3.90 per share interim dividend) to maintain financial flexibility.
"By owning 100 per cent of Vedanta (from the current 50.14 per cent), VRL''s consolidated EBITDA will likely double as it will have full access to Vedanta''s share of HZL''s dividend," it said.
In the past, the group has undertaken transactions bypassing shareholder approval to access cash in these companies. The 2015 $125 mn loan by one of Cairn India''s subsidiaries to one of Vedanta''s subsidiaries is one such transaction5.
Past mergers and acquisitions can be attributed, to an extent, to improve financial flexibility of the group and manage debt repayments.
The August 2013 merger of Sesa Goa into Sterlite Industries Ltd (Sterlite) created a combined balance sheet that had better credit metrics. The 2016 merger of Cairn India with Vedanta Ltd once again allowed Vedanta''s debt-heavy balance sheet to leverage on Cairn''s cash-heavy balance sheet. The promoters have not injected any equity into the business in over ten years, even as turnover, on a consolidated basis, increased from Rs 66.7 bn in FY10 to Rs 920.5 bn in FY19 (through organic and inorganic expansion).
"Vedanta''s delisting will likely be funded through debt, which will add to group leverage, and create a greater imperative to access the operating companies'' cash flows," IIAS said.
"Although repayment pressure of the group drives the decision to delist, the timing of the delisting is best suited for the promoters," it added.
Vedanta''s stock price has been trading close to its 52-week low (up until the delisting was announced), and at a steep discount to its historic five-year average - a fallout of the current economic environment and the impact of the Covid-19 crisis on equity markets. At the floor price, VRL would be expected to invest $2.2 bn to delist the company.
IIAS has pointed out five delisting attempts by companies where there was a difference between the floor price and the discovered price.
In the case of Linde India, it was 373 per cent where the discovered price was that much higher, in Essar Oil, it was 132 per cent, in Essar Shipping it was 42 per cent, in Polaris Consulting, it was 30 per cent while in Claris Lifesciences, it was 14 per cent.
Citing its rationale for voting for the resolution, IIAS said: "The group''s past behaviour seems to suggest that minority shareholders are a hindrance to the promoters'' ambition."
"Cash flowing from the operating companies to the holding companies has been an element of concern for shareholders, and some of the transactions have taken investors by surprise. This risk continues to remain very real going forward," it added.
"The regulation protects minority shareholders by allowing price discovery through a reverse book building process. In the past, there has been a wide variation between the floor price and the discovered price. Therefore, we expect investors to be discerning and not anchor their price bids to the floor price," it said.
The past actions of the promoter group suggest that they are willing to pay a premium as was the case in VRL''s delisting from the London Stock Exchange and Cairn''s merger into Vedanta, IIAS added.
According to a research report by HSBC Global Research, the focus remains on delisting process with shareholder approval awaited.
HSBC said: "A weak commodity outlook, high leverage (and zero EBITDA) at the parent level and inefficiencies in the current group structure (causing leakages in channelling dividends to promoter entities) have led to the promoter intending to delist Vedanta Limited."
According to HSBC, the proposal needs two-thirds approval from public shareholders via a postal ballot for which results are due on June 24, which would kick start the reverse book building process.
HSBC has said that Vedanta Ltd balance sheet is relatively resilient, however, leverage rises significantly at the group level after accounting for debt on the books of VRL and Volcan.
(Sanjeev Sharma can be contacted at firstname.lastname@example.org)