Morning Mumble (Via Email): Vedanta Resources (VED) Wanna-B-LT & the need for circa $3.5B+ more in cash & as a side thought OXUS (OXS)

Good Morning,

The proposal, Vedanta Limited (VED Ltd) and Cairn India are to benefit by the merger. Vedanta Resources (VED) ownership in VED Ltd "may" be diluted to 50.1% from its current 62.9% holding.

Cairn India’s implied premium is 7.3%, not exactly enticing even allowing for the 7.5% Redeemable Preference Share. The alleged sweetener and merger is on the basis the deal is “allegedly” going to be tax neutral.

Its over to the minority holders of Cairn India to a) accept it b) hold up for an improved offer or b) worse the Indian government take a ‘different’ view on the valuation. If either happen, VED has serious issues with much needed cash, their financial covenants are in tatters.  

The biggest argument for the merger is allegedly to add “protection in diversity” in the business model. Quite why there’s a benefit to those “oil” investors that allegedly get exposure to “tier 1” assets is another story. The real benefit is the cash for VED (and associated entities) whom will also benefit from the re-rating.

Assuming all goes well, tax neutrality, and shareholder support, VED will be well placed. The question why Cairn India holders would want it, whether there’s a viewpoint of a bottom in commodity cycle taken or hope of recovery (overall).  After all, VED Ltd has had all its profit depleted by the commodity cycle. Aluminium en par with the collapse in oil, although oil has made some recovery.

VED’s entire structure is not out of the woods yet. VED Ltd need more cash than just “Cairn India’s” and the likely merger of Hindustan Zinc Ltd (HZL)(64.9%) that has near $1.5B in cash and Bharat Aluminium Company Ltd (BALCO) that has circa $1B in cash. The issue will be the Indian Government still has a near 29.5% holding in (HZL) and 49% in BALCO.

A recent enquiry  has just been dropped in respect of how “certain entities” including VED Ltd obtained their stake in HZL. This also included concerns over the price paid, which one might consider laughably cheap. Amazingly, Indian Government might not be so willing to let the remaining stake go as cheaply or without a special dividend.  

The sticking point is VED Ltd believe they have call options HZL and BALCO. Whereas the Indian Government don’t recognise nor consider these call options legal or valid. Whether the Indian Gov want to sell out their remaining 29.5% share in HZL and 49% in BALCO is another matter, or whether they want shares in VED Ltd. Admittedly the government have included the sale / proceeds of BALCO and HZL in their fiscal budget for next year (2016).

The Indian Government would be wise to convert the holding into VED Ltd, not only diluting VED’s UK holding/shareholders sub 50% perhaps more 35% (based on approximate valuations). The control benefits would be obvious…

A pure cash grab, whether BALCO and HZL are converted/merged remains a matter for the Indian Government demands/terms. Perhaps VED Ltd would be wise to maintain the current status quo, especially after the coal debacle in BALCO.

Over to those “minorities” to decide the outcome, perhaps determined over the weekend, VED will have to work hard to even justify anything near 600 pence. 

Its accepted that there's a confidentiality arrangement with regard to the international proceedings between the Republic of Uzbekistan and Oxus. Normal caveats to the risks associated with gossip, there appears to be some speculation in Uzbek, that negotiations are currently taking place between the two parties. Perhaps the company would like to clarify this. Whether these mutterings are speculators tired of the proceedings taking an inordinate length for award or not, one suspects they have a sniff of truth about them.  

Atb Fraser