One day, a colleague of the prominent Soviet theoretical physicist Yakov Frenkel (1894-1952) met him seeking an explanation for a graphical curve drawn on a sheet of paper. It was the result of Frenkel’s latest experiments. Frenkel took the paper and began to explain his work. Suddenly, his colleague exclaimed, “I beg your pardon. I showed the curve upside down!” Without missing a beat, Frenkel turned the paper around and started to give an equally convincing explanation for the reversed curve.
Corporate India witnessed something similar over the past week.
Billionaire Anil Agarwal-owned Vedanta Limited on September 29 announced the demerger of its five operating businesses -- aluminium, oil and gas, base metals (mainly copper and zinc international), ferrous (steel and iron ore mining) and power.
“By demerging our business units, we believe that will unlock value and potential for faster growth in each vertical. While they all come under the larger umbrella of natural resources, each has its own market, demand and supply trends, and potential to deploy technology to raise productivity,” Anil Agarwal, Chairman of Vedanta, said in a statement after the board meeting.
Note the keywords here -- ‘Unlocking value’, ‘faster growth’, ‘raising productivity’. All noble goals, of course.
Curiously, these were among the justifications given around a decade back when UK-based Vedanta Resources Plc went on a consolidation spree.
Also Read: Vedanta’s demerger is a clean one, but leaves some questions unanswered
Dialling Back
In 2006, Vedanta Resources had acquired a 51 percent stake in Sesa Goa, which in turn bought a 20 percent stake in Cairn India four years later. Then in 2011, Vedanta Resources acquired a 38.5 percent stake in Cairn India, taking the total to 58.5 percent.
On February 25, 2012, Vedanta announced the merger of its Indian firms Sesa Goa and Sterlite Industries into a single entity Sesa Sterlite. Vedanta’s direct holding in Cairn India was also transferred to Sesa Goa, together with associated debt of USD 5.9 billion.
Here’s how the management had justified the move back then.
“Sesa Sterlite will be one of the largest global diversified natural resources majors, supporting the country’s industrial growth. This transaction is a natural evolution, leading to simplification of the Group’s structure. Sesa Sterlite will be the principal operating company in the group and with its high quality assets, growth projects and strong management, it is well placed to create value for all shareholders,” Anil Agarwal was quoted as saying in the company’s filing on February 25, 2012.
The keywords at that time were ‘simplification of group structure’ and the holy grail of corporate speak – ‘creating value for shareholders’.
MS Mehta, the then Group CEO, too said the consolidation will “create value for all shareholders”.
“It will lead to a simpler and more efficient structure and will facilitate more flexible allocation of capital. Our shareholders will benefit from unparalleled growth across metals, mining and oil & gas, besides, the increased synergy,” he had said.
Surely no M&A press release is complete without the word ‘synergy’ making an appearance somewhere.
PK Mukherjee, the then Managing Director of Sesa Goa, had said in addition to being part of a much larger group with an increasingly global shareholder base, Sesa Goa will benefit from diversification, “whilst increased scale will reduce volatility of earnings and cash flows through the commodity cycle”.
Also Read: 'Promoters of Vedanta should be able to scrape through the debt trap this time'
In a section titled ‘Transaction Rationale’, the filing had said the increased diversification is expected to reduce volatility of earnings through commodity cycles, lower the cost of capital and enhance value.
“The consolidation and simplification of the Group structure is consistent with the Group’s strategy. The elimination of cross holdings 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 cashflow,” it added.
Fast Forward
In its latest exchange filing on September 29, 2023, the company said the demerger “simplifies Vedanta’s corporate structure with sector focussed independent businesses”.
‘Simplification of the Group’s structure’ was also cited as a reason for the merger of its businesses in 2012. How can both a merger and demerger lead to the same outcome?
Email queries sent to the company did not elicit any response till the time of publishing.
However, in the company’s conference call on September 29, Indrajit Agarwal of CLSA asked the management about Vedanta’s entire consolidation exercise in 2012-13, followed by delisting of several subsidiaries and its demerger plan in 2021 which was eventually scrapped.
“So what has changed in the past five years, seven years, 10 years?” he asked.
Omar Davis, President-Strategy at Vedanta, replied that 24 months ago, topics like energy transition, China Plus One, India's growth, inward investment and resource nationalism were nascent themes, not nearly as advanced as we see today, “particularly in respect of the explosion of interest that we see”.
“We see it in our asset base, I presume our peers do as well across India. So our ability to point the company towards those pools of capital we began to feel was more constrained in our current format than it will be going forward in the new structure,” Davis added.
Many analysts, however, remain skeptical about its medium-term prospects.
On the day of the demerger announcement itself, S&P Global Ratings downgraded parent company Vedanta Resources Ltd’s (VRL’s) rating due to a potential bond extension exercise.
“The proximity of VRL’s large bond maturity in January 2024 has increased the likelihood of the company undertaking a liability management exercise. VRL has initiated talks with bondholders to help address the company’s bond maturities of about $3 billion, including $1 billion, in January 2024," it said.
Others have highlighted headwinds like corporate governance issues, lack of clarity on debt repayment and intercompany transfer of funds.
Investors, naturally, are awaiting concrete details on these pressing concerns. After all, there are only so many times a company can explain its way out of trouble.
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