Vedanta Limited Delisting Analysis

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Vedanta Limited announced delisting plans in May this year. Since then, the company received shareholder approval for delisting, and the promoters have been working towards raising the requisite debt required to delist the company successfully.

While the current market price is around ₹130/share, interestingly, events of the last few months point to a final delisting price of upto ₹590/share.

First, the promoters tied up a short-term loan of $1.75 billion with a 90-day maturity. This loan was necessary to provide potential bondholders comfort that the promoters can raise the debt required for a successful delisting. On Aug 19, the promoters successfully raised $1.40 billion in bonds. Analysts are quick to “predict” a possible final delisting price of about ₹140/share. Add the two loans ($3.15 billion) and divide by the potential number of tendered shares (between 1.48 to 1.85 billion shares).

Question. If Mr Anil Agarwal was offered the company at ₹150/share, will he walk away? What about ₹200/share, will he walk away then?

Here is what we are missing. Mr Agarwal cannot afford delisting failure. Currently, he cannot get a better debt rating until he successfully delists Vedanta Limited (….” Moody’s views the privatization as credit positive and a major step in the simplification of the company’s complex group structure with less than 100% ownership in operating subsidiaries, which has historically hindered its credit profile “…). His current bond offering is a clear indication of how difficult it is for him to raise debt: 

  1. The $1.75 billion short-term loan gave bondholders the confidence needed that Mr Agarwal could raise debt for the delisting.
  2. Mr Agarwal had to offer (never offered before) collateral (from a step-down subsidiary that owns Vedanta shares). So yes, Vedanta Limited shares are also, in a way, pledged;
  3. Offer high yield (13%);
  4. Mr Agarwal had to commit to a time-line for delisting. That is, approval from exchanges to start the reverse book building process within 45 days of bond raise (45 days from Aug 18 is Oct 2);
  5. Mr Agarwal also had to offer to redeem, if delisting fails. 
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The official company press release said about the $3.15 billion raise, “This completes VRL’s planned fund-raising programme in preparation for the proposed delisting of its subsidiary, VDL..”. This raise was in PREPARATION of delisting, but indeed this is not the end. The promoters must be prepared to raise more funds, if required, for a successful delisting. GlobalCapital reported, “…it has the flexibility also to raise a second term loan”, indicating the promoters willingness to take on more debt for the successful delisting of the company.

Mr Agarwal cannot use Vedanta Limited cash for delisting purposes. However, he can take a short-term loan, successfully delist the company and later, as a private company, use company cash to pay for the short-term loan. For the delisting purpose, Mr Agarwal cannot take on any more long term debt (apart from the $1.40 billion bonds raised on Aug 18). He can, however, surely enhance the existing short-term loan up to the cash availability on Vedanta Limited books. Vedanta Limited owns 64.92% of Hindustan Zinc. Mr Agarwal can access cash on Hindustan Zinc’s books as well. He can also simply pledge Hindustan Zinc shareholding to avoid “dividend leakage” to the government and other minority shareholders.

Interestingly the total cash availability number between the two companies is at least $8.50 billion. Banks can lend a short-term loan up to available cash. Add the $1.40 billion bonds raised this month and that is a total of about $10.00 billion or ₹405/share (a conservative number, assuming promoters buy out ALL minority shareholding, not the minimum needed for 90%). ₹405/share is the high price on a range he could be willing to pay.

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In the event the discovered price at reverse book building is too high, the delisting regulation allows promoters to make a counteroffer, but this counter must be above the book value. In Q4, Vedanta declared a pandemic related impairment charge of about $2 billion. This charge interestingly also reduced book value. During the analyst call for Q4 results, the company estimated that “more than half” that charge was price related, assuming a $20/barrel oil price the next three years. In reality, the oil price at $20/barrel was quoting for less than one month. Oil prices are already over $40/barrel. More detail, on this impairment charge, is available, in an Aug 12 parent company statement. It seems price-related impairment is about $1.8 billion, a lot more than half, as earlier stated by the company. Remember, this is just an easily reversed accounting charge. Institutional Investors would readily understand this and should rightly ignore the impairment charge when calculating book value. This “real” book value is about ₹200/share.

In a recent interview, Mr Agarwal pointed to dividend “leakage” as an issue or principal reason for delisting. 50% of Vedanta Limited dividend goes to minority shareholders. The parent company in London is dependent only and entirely on Vedanta dividend to service and retire bond debt. That’s an estimated dividend payout of ₹250/share over the next six years or an average of ₹40 per year for the next six years (I ran a quick XLS on these numbers). It would make sense then for Mr Agarwal to offer this ₹250/share upfront to buy out minority shareholders. ₹250/share is the low price on a range he could be willing to pay.

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Expect a Public Announcement from the company regarding the delisting process before End Sep 2020 (based on the 45-day target set for the $1.4 billion bond raise). The delisting process will be all over by end Oct 2020. Also, one can expect an unsurprising final price for delisting between ₹250/share and ₹405/share. Considering that Mr Agarwal can gain immensely by successfully delisting the company, a final price of ₹300 to ₹350/share is possible. There may be no downside. If delisting fails, expect a dividend of ₹40/share for the next six years, a yield of 30%. Even at the current market price of ₹130/share, Vedanta Limited stock looks like a solid buy.

AUG 29 UPDATE. Just reported, Vedanta Limited pledged ALL its Hindustan Zinc shareholding, valued at $8.50 billion as on Friday closing. Lenders could extend a loan of maybe up to 75% or $6.30 billion. Besides, Vedanta Limited has about $6.80 billion in cash on hand, and then there is cash from $1.40 billion in bonds. That’s a total of $14.50 billion. Hence, Mr Agarwal can potentially enhance the existing short-term loan to $14.50 billion. It’s probably not realistic to think he would use all that for the delisting, but it does provide us with a ceiling. This $14.50 billion translates to ₹590/share (a conservative number, assuming promoters buy out ALL minority shareholding, not the minimum needed for 90%). ₹590/share is the high price on a range he could be willing to pay. There is a high likelihood that the delisting will be successful with a final price of over ₹350/share.

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Sachin Chandavarkar
Managing Director - South Asia and Middle East at Paragon Principal Capital
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