Lenders not enthused by Vedanta proposal for six-unit split: Official

What has come under the scrutiny of banks is that the group was looking at merging and delisting at one time and now it is going for carving out businesses and listing them.

Vedanta announced a vertical split of different businesses into six different entities in its pursuit of unlocking value. “This would reduce the fungibility of cash flows across businesses and increase earnings volatility, which could be a concern for lenders,” Kotak Securities said in a report.

The demerger reverses Vedanta’s past efforts (during 2012-17) of consolidating stakes in different businesses and contradicts the rationale of past corporate actions. “VRL’s (parent) high leverage and funding gap for upcoming bond maturities is a key overhang for Vedanta Ltd and we believe the divestment of non-core businesses is the need of the hour,” it said.

The scheme of the arrangement will result in the listing of six different entities: Aluminium, oil & gas, power, steel and ferrous materials, base metals and Vedanta Ltd. Vedanta Resources (VRL) net debt was at $ 7.8 billion

It will transition to become the holding company for Hindustan Zinc and incubator for new businesses (including display fab and semiconductor forays). Management believes the demerger would unlock value, as it would create investment opportunities for investors looking for exposure in a particular business. Each shareholder of VEDL will receive one share of each of the six entities.

Along similar lines, Hindustan Zinc has also initiated a comprehensive review of its corporate structure, with an intention to create separate legal entities for the zinc-lead, silver and recycling businesses. Demerger would reverse Vedanta’s past efforts of consolidation, Kotak report said.

Vedanta management estimates a time period of 12-15 months for the implementation of the demerger and separate listing of companies.