In 2012, Anil Agarwal looked at his vast commodity empire encompassing copper, iron ore, oil and gas, and aluminum and decided that something was lacking. He believed it needed a boost, and his solution was to undertake an epic merger, consolidating all of his Indian businesses under one entity.
His rationale at the time was straightforward: diversified companies were more valuable, generating 30%-40% more value than standalone entities focused on a single sector, such as oil & gas or power. The idea was to simplify the structure, create more value for shareholders, and ultimately increase profits by sharing resources and cutting costs.
However, fast forward to today, and Anil Agarwal is reversing his philosophy. He has announced a demerger, essentially undoing everything he accomplished over the past decade. This time, there will be six listed businesses on the stock exchange, even more than before.
If you currently own one share of Vedanta Ltd, you could soon hold one share of five more entities: Vedanta Aluminium, Vedanta Oil & Gas, Vedanta Power, Vedanta Steel and Ferrous Materials, and Vedanta Base Metals.
So, what’s the rationale behind this change?
Today, the prevailing sentiment is that “pure-play” listed companies are more attractive. The investment landscape has evolved, and listing each company separately provides investors with choices. Someone interested in oil and gas may not want to invest in aluminum.
This approach may facilitate fundraising and, since each entity will have dedicated management specializing in its specific commodity, could unlock greater value and lead to faster growth.
At first glance, it might appear that these are two completely unrelated and perplexing decisions. However, there is a common thread connecting them: debt.
Anil Agarwal’s journey is fascinating, starting as a scrap metal trader in Mumbai in the 1970s and gradually building the sprawling Vedanta Resources conglomerate through acquisitions. To achieve his ambitions, he incurred significant debt. According to Forbes, Vedanta Resources (the parent company) had a total debt of $1.7 billion in 2007, which ballooned to a staggering $17 billion by 2012.
The merger was a strategy to transfer some of the debt from Vedanta Resources to the newly listed subsidiary, aiming for a 60% reduction in debt. However, this provided only temporary relief, as the company’s ambitions grew, and so did its debt levels.
High debt has now become a major hindrance, with the net debt to EBITDA ratio nearly at 4x. Vedanta Resources owes its lenders over $4 billion in repayments over the next year and a half, and credit rating agencies are considering downgrading its credit ratings, making it challenging to borrow more money.
The recent attempt to raise funds by involving Hindustan Zinc, a subsidiary, didn’t go as planned, with investors unhappy about the deal. The Indian government, which also had a stake in Hindustan Zinc, raised concerns about the potential loss of value in the subsidiary.
So, how does the demerger of the Indian arm help reduce debt?
Directly, it doesn’t. However, it could be a strategic move to buy time. The demerger is a complex process, requiring shareholder and lender approval, and it will take more than a year to complete. Afterward, setting up each new entity will also take time.
Some analysts believe it could take two years for Vedanta to reorganize itself. This extended timeline might offer Vedanta the opportunity to go back to lenders, assure them of the efforts to create a more agile organization and request refinancing and additional time to repay its debt.
In essence, the demerger may be a maneuver to ease the debt burden by unlocking cash through the sale of stakes in the newly listed entities once the dust settles.
Whether this strategy will succeed remains uncertain, but Anil Agarwal has a track record of adaptability and resilience. Only time will tell if this demerger will lead to new heights for Vedanta or further challenges.