Vedanta delisting: Can Hindustan Zinc lend a helping hand ?

Satya Sontanam BL Research Bureau | Updated on July 14, 2020 Published on July 14, 2020

There have been media reports that Hindustan Zinc Limited (HZL) has been seeking to raise loan for funding Vedanta’s delisting offer. Earlier, reports had suggested that HZL might announce dividend to aid the delisting get through. Is such support from HZL possible? What are the alternative options?

Stressed Vedanta

Metals and mining conglomerate Vedanta on May 12 announced its holding company’s plans to delist the Indian business. The holding company, Vedanta Resources, has proposed acquiring fully paid-up equity shares of the company that are held by public shareholders at an indicative offer price of ₹87.5 per share.

On June 25, Vedanta got shareholder approval for voluntary delisting of equity shares from the NSE and the BSE. The final price at which delisting happens will be determined by the reverse book-building process.

The final price is expected to be much higher than the indicative price as the latter does not reflect the value of the company.

Even if the final price is close to current market price, around ₹110 per share, the holding company would require about ₹20,200 crore to carry out the transaction. This transaction is expected to be debt financed as the holding company’s financial position seems to be stressed.

According to the rating agency Moody’s, Vedanta's liquidity position is weak, especially at the holding company level with $1.8 billion (about ₹13,500 crore) debt maturing until September 2021. Moody’s also pointed that the widening yields, falling bond prices and tight capital market liquidity have heightened refinancing risk to the company going ahead.

Is HZL the last resort?

News reports suggest that the holding company may take aid – to an extent - from Hindustan Zinc, an arm of Vedanta, whichcontributes about 40 per cent to Vedanta’s (India) operating profit.

Experts believe that Hindustan Zinc’s aid to the promoters could be in the form of the company announcing dividend to shareholders that includes Vedanta (India), which holds about 65 per cent in HZL.

If what experts believe is true, there comes another question-- if HZL would use internal resources or raise a new debt to fund the dividend.

As on March 31, 2020, HZL’s net cash and cash equivalents was ₹21,596 crore compared to ₹16,953 crore towards the end of FY2019. The company also stated that the capex for FY21 will be lower as the focus is on conserving cash.

Meanwhile, note that no promoter shall directly or indirectly employ the funds of the company (that is to be delisted) to finance the delisting, as per SEBI delisting rules. Thus, it becomes clear that the dividend that will be received by Vedanta (India) cannot be used to fund the delisting.

A way out for Vedanta (India) could be announcing dividend, using the dividend received from HZL, which would ultimately reach its parent company or promoters – Vedanta Resources.

But such transaction of extracting dividend from a step-down subsidiary HZL is not too effective due to the leakage in the form of dividend that has to be given to public shareholders.

An inter-company loan from HZL to the promoters is another way out. We have to wait for the final contours to emerge.

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Published on July 14, 2020
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