The Hindu Business Line : Sterlite restructuring: Creating focussed businesses

The Sterlite group has announced a restructuring of its companies, including the listed Sterlite Industries and Madras Aluminium Company (MALCO), intended to reduce cross-holdings of equity stakes and enable better focus on three main lines of commodity businesses — copper, aluminium and iron ore.

Normally, an announcement such as this would result in the stocks of the listed companies moving immediately to close the arbitrage opportunity created by the exchange ratio for the merger/demerger.

However, this may not happen in this case given that the restructuring exercise involves partial transfer of businesses between companies and includes unlisted group entities, making the final financial contours of each business difficult to estimate at this stage.

Even divining whether the swap ratio values each of these businesses fairly is not possible now, as the business profiles for both MALCO and Sterlite are set to change substantially after restructuring.

Investors in the two companies are to receive shares in addition to their existing holdings.

For the investors

Investors in each of the companies — Sterlite Industries and MALCO — are set to receive shares in the other company (in lieu of cash) to compensate for a transfer of business or ownership interest proposed in this restructuring. Shareholders of Sterlite would get 7 shares of MALCO for every 4 held; in return for the demerger of the aluminium related assets to MALCO.

Shareholders in MALCO would get to exchange every 51 shares for one share in Sterlite. MALCO, post-restructuring, will see the addition of new aluminium and power assets, but will also see manifold expansion in its equity base, after it issues new shares to Sterlite’s shareholders.

Sterlite, on its part, will see a substantial reduction in contributions from the aluminium and power assets and will see equity dilution, but will acquire a higher interest in the copper business.

For the business

This restructuring involves a three-step process. First, the aluminium and energy businesses of Sterlite will be de-merged and transferred to Madras Aluminium Company and the new entity is to be called Sterlite Aluminium. Second, MALCO’s holdings in Sterlite will be surrendered. Third, Vedanta’s holdings in Konkala Copper Mines will be transferred to Sterlite.

These moves are expected to create three clearly focussed businesses in this group that will concentrate on copper, zinc and lead (Sterlite Industries), aluminum (Sterlite Aluminium) and iron ore (Sesa Goa).

The transfer of equity stakes is also expected to lead to a more simple holding structure, with Vedanta Resources Plc emerging as the holding company for all three businesses. Strategic clarity, elimination of conflicts of interest and flexibility to pursue better growth opportunities are the stated reasons for these moves.

The three key businesses emerging from this restructuring would no doubt each be attractive plays on the commodity cycle, with world-scale capacities.

Sterlite Industries with copper production capacities of about 1.1 MTPA (should the Asarco acquisition go through), Sesa Goa with a planned iron ore capacity of about 25 MTPA by 2010 and Sterlite Aluminium with a proposed aluminium smelting capacity of about 2.6 million tonnes by 2012.

The group proposes to fund expansion plans through debt and internal accruals. However, with limited information now available on how the financials of the listed companies may shape up post restructuring, investors may be better off staying away from these stocks until clarity emerges on this score.

More Stories on : Stocks | Restructuring | Metals | Sterlite Industries (India) Ltd

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