Sesa Sterlite: A resource giant of global size

Anil Agarwal-controlled Sesa Goa, India’s largest exporter of iron ore, will absorb another group company, Sterlite, in an all-share transaction. Sterlite shareholders are happy: giving up five shares of Sterlite for three shares of Sesa Goa makes them richer by.`30, on a 52-week average price. London-listed Vedanta will transfer its 38.8% stake in oil producer Cairn India as well as its debt of $5.9 billion for $1 to Sesa Sterlite. This will slash debt on Vedanta’s books, and earn it some brownie points from rating agencies. The combined debt of the group hit $9.65 billion after the near-$9 billion acquisition of Cairn’s India assets. With better ratings, Vedanta’s borrowing costs overseas could fall: the company reckons that the merger will save it about $200 million a year. Sesa Sterlite will be listed in India and the NYSE, becoming the world’s seventh-largest minerals and metals player, with a 58.9% holding in Cairn. Unlike group company Vedanta Aluminium, Cairn has strong cash flows, and after the restructuring, it can raise low-cost loans on behalf of the parent. Agarwal says that Sesa Sterlite will become the main vehicle for future acquisitions as he tries to take the group to the league of companies like Brazil’s Vale, Australia’s BHP Billiton, et al.

Agarwal believes, correctly, that a metal-only company can be subject to massive global shocks, the likes of which forced Vale to diversify into coal and other minerals. The purchase of Cairn’s oil assets allowed Vedanta to diversify away from aluminium, copper and zinc. It is also trying to enter the coal business, now reserved for government, except for some captive mines. We have argued against both state monopoly and captive mining, and, instead, for opening up the coal sector to competition. These policy changes, along with a transparent system of auctioning mining leases and compensating people affected by mining, will boost the efficiency of India’s resources sector. With proper rules, specialised prospecting and mining companies will enter India, and the government must make sure they act in an environmentally-responsible manner. Then, we shall have national champions in the resources sector.