Vedanta de-listing offer price Rs 87.50~Come on Mr Anil Agarwal !

Vedanta de-listing offer price Rs 87.50~Come on Mr Anil Agarwal !

Promoter Group of  Vedanta Ltd has proposed a voluntary de-listing at an indicative offer price of Rs 87.50~are the over 7.3 lakh minority shareholders from Alibag !? …apologies to the people of Alibag

Some would term this as De-listing Duplicity ~ but I would not go that far for you’re a Promoter taking advantage of this Covid-19 crisis caused plunge in Share Prices to de-list at a low price while complying with the SEBI Pricing Formula

Promoter Group Company Vedanta Resources Ltd,London has conveyed to listed Vedanta Ltd that the Promoters  want to buy out minority shareholders of Vedanta Ltd at an indicative price of Rs 87.50 !

Even the Book Value of Vedanta Ltd was Rs 167 at March 31,2019 on a consolidated networth of Rs 62297 crs and Equity of Rs 372 crs of Face Value Rs 1  and rose to Rs 188 on a networth of @ Rs 70000 crs as on December 31,2019

But’s there’s more to this as you move through this blogpost to sense that this is not the first time that the Promoter Family of Brothers Anil & Navin Agarwal  have short changed the minority shareholders in their group companies or for that matter even have other Industrial Groups in their listed companies at the time of de-merger or de-listing

Look at the speed !

• Tuesday May 12,2020 ~ Vedanta Ltd notifies the BSE & NSE that the Board of Vedanta Ltd has scheduled a Meeting on Monday,May 18,2020 to consider a voluntary de-listing Proposal as they have received a letter from Vedanta Resources Ltd,London offering that the Promoter Group will buy out all the Public Shareholders who hold 169,10,90,351 Equity Shares aggregating to 48.94% of the paid-up equity share capital of the Company. This includes Equity Shares held by the Employee Trust but excludes 6,54,45,052 American Depository Shares against 26,17,80,208 number of underlying Equity Shares. Other than 2,48,23,177 ADS representing 9,92,92,708 equity shares which are held by one of the members of the Promoter Group, the remaining ADS are held by persons who would be considered to be Public Shareholders in the event they chose to convert the ADS into Equity Shares American Depository Shares  issued by the Company. Indicative Price given by them is Rs 87.50 per share.. Should all the outstanding ADS be converted into Equity Shares, the shareholding of the the Promoter Group will be 186,36,18,788 Equity Shares aggregating to 50.14% of the paid-up equity share capital of the Company Public Shareholders will be 185,35,77,851 Equity Shares aggregating to 49.86% of the paid-up equity share capital of the Company. The Meeting will take on record and review the due diligence report of the Merchant Banker in terms of Regulations 8(1A)(ii) and 8(1E) of the Delisting Regulations to approve/ reject the Delisting Proposal after taking into account various factors and the
  Merchant Banker’s due diligence report
• Wednesday,May 13,2020 ~ Vedanta Ltd notifies the BSE & NSE of the appointment of SBI Capital Markets as the  Merchant Banker to do the due Diligence for the voluntary de-listing proposal    
• Monday,May 18,2020 ~ Vedanta Ltd’s Board of Directors Meeting to take on record and review SBI Capital Markets due diligence report and accept or reject the voluntary de-listing proposal

What Haste ! ~ stinks of a foregone favourable conclusion in favor of promoters ! ~ this would mean SBI Capital Markets will have to submit it’s due diligence report inside just  five days for the Board to consider on Monday,May 18,2020 !~ Ridiculous ! ~given the constraints of the Covid-19 crisis lockdown how will they accomplish this given the restrictions ~ due diligence goes beyond reviewing just the documentation handed  by the company to them or whats’s available in the public domain ~ reminds me of the time the Deputy Director of the Company Law Board (CLB) had scathingly remarked at a CLB Hearing  in the Satyam & Maytas Properties  Scandal of a decade ago as to how could the leading audit firm E & Y could have done the Property Valuation of Rs 6523 crs in just one day !  You can read this amusing 2009 blogpost of mine here

Why is Rs 87.50 a ridiculously low indicative price to de-list

There are numerous arguments for this but what is most compelling and which amounts to significantly short changing the minority shareholders is the value of  Vedanta Ltd’s holding in listed Hindustan Zinc :

• Vedanta Ltd   holds 64.92 %  or 274.31 cr shares of the Equity in the listed Hindustan Zinc in which the Government of India holds 29.58% stake
• Hindustan Zinc closed at @ Rs 193 on BSE today at which Price the Market Capitalisation is @ Rs 81500 crs
• Thus Vedanta Ltd’s share of this Market Cap is @ Rs 53000 crs which works out to Rs 142 per share of Vedanta Ltd’s Equity of Rs 372 crs of FV Rs 1
• The Promoter Group holds around half of Vedanta Ltd and thus minority shareholders are entitled to half of Rs 53000 crs that’s Rs 26500  crs
• By delisting at Rs 87.50  the Promoter Group would be expending just @ Rs 16500 crs for buying out the public shareholding that holds half of Vedanta Ltd
• Imagine this scenario where they buy out shareholders of Vedanta at Rs 16500 crs and thus own 100% of Vedanta Ltd and thus are full ‘malik’ of the 64.92 % stake held by Vedanta Ltd in Hindustan Zinc that’s worth Rs 53000 Crs of which Rs 26500 crs would have actually belonged to the minority shareholders of Vedanta Ltd ! ~ this is thus a squeeze of Rs 10000  crs
• Don’t give me this hogwash of holding company haircuts now  because when Promoter is planning to de-list they you need to give the full benefit as per market value too to the minority shareholders.This Rs 53000 crs share of Market Share in Hindustan Zinc works out to Rs 142 per share of Vedanta Ltd  
• Hindustan Zinc has also just announced an interim dividend of Rs 16.50 per share for FY 20 that’s gone by which would mean Rs 4526 crs will be received by Vedanta Ltd for the 64.92 % stake or 274.31 cr shares it holds in Hindustan Zinc

Segment Performance of Vedanta Ltd for the nine months at December 31,2019

I’m not even going into the Valuation of the other operations of Vedanta Ltd that spread over  52  subsidiaries,Two Associates and three jointly controlled companies and it’s Operating Segments cover Zinc,Silver,Lead,Oil & Gas,Aluminium,Copper,Iron Ore,Power

It yet has to announce the Full Financial Year 2019-20 Results  & no decision on voluntary de-listing must happen before these are available

What we do have is the Performance for the Nine Months at December 31,2019 to guide us at this stage .The Gross Debt was Rs 58589 crs and with Cash & Equivalents at Rs 35205 crs the Net Debt works out to Rs 23384 crs.

75% of Sales come from segments other than Zinc ,Lead & Silver but contributes only 29% of the profits .It’s losing money in it’s Aluminium and Copper Operations which contributes to 42% of Revenues.Oil & Gas business is going to be challenged in FY 21 with demand destruction and crude prices halving in an Oil Shock in March 2020.

Here’s the consolidated segmental breakup in Rs Crs for the nine months ended December 31,2019

Sr	Segment	Revenues	Profit	Net Assets
1	Zinc & Lead ~ India	12023	3435	}16683
2	Silver ~ India	1843	1610	}
3	Zinc ~ International	2395	(41)	5342
4	Oil & Gas	10257	4357	21150
5	Aluminium	20199	(492)	33749
6	Copper	6797	(385)	4219
7	Iron Ore	2390	460	1920
8	Power	4656	678	16806
9	Others	3558	(93)	6758
	Adjustments	(86) Inter segment	(3913) Finance Costs	(20943) Unallocable
			1648 Unallocable Net Income
			(254) Net Impairment & other exceptional items
		64032	7010	85684

There’s an interesting observation on the recent dividend history.For FY 19 Dividends of Rs 18.85 per share were  paid out (Rs 17 in November 2018 and Rs 1.85 as final) with the then new CEO, Srinivasan Venkatakrishnan ,boasting in the Annual Report of a 8.6% dividend yield indicating a share price then of @ Rs 162.It did not mention that the dividend payout was actually nearly 100% of the profits of FY 19 or full EPS .In fact the FY 19 Networth declined marginally from FY 18 despite a profit of Rs 9698 crs  .For FY 20 the Dividend of just Rs 3.90 has been paid .The Dividend Yield is yet strong at 4.3% on a current price level of Rs 90

Sterlite Technologies ~ An illustration of  Shortchanging Minority Shareholders in the recent past   

I wonder who’s done the Valuation of Vedanta Ltd that guided the Promoter Group to propose de-listing at this ridiculously low price of Rs 87.50 !

On the demerger of subsidiary Sterlite Power Transmission Ltd (SPTL) from the listed Sterlite Technologies Ltd(STL) ,I had penned extensive blogposts here in 2015 and  here in 2017 to showcase how over 60000 minority shareholders were seduced to sacrifice gains.In May 2015 leading audit firms of Shailesh Haribhakti and Price Waterhouse had valued the SPTL share at Rs 111.50 and  Rs 112.30 respectively valuing the Business under Rs 900 crs .STL went with PWC Valuation when they made an offer to the shareholders. SPTL was not to be listed .

There were two options for Resident Shareholders of STL in August 2016 ~ receive Equity Shares of  SPTL at Rs 112.30 (FV Rs 2) in a 1: 5 ratio for shares held in STL or go for the 8% Preference redeemable shares of Rs 112.30 in the same 1: 5 ratio that would be redeemed at Rs 125.55 in eighteen months from allotment.Over half at over 60000 shareholders from the 122000 shareholders at the time decided to cash out through the preference shares

It was not disclosed that the earlier  Share Purchase Agreements  with all the Private Equity Players in Sterlite Power Transmission business like Standard Chartered Bank stipulated an IPO for an exit.In March 2017 just eight  months after the De-merger in another Equity Dilution & Restructuring  exercise SPTL informed shareholders of an EGM to allot shares at  Rs 464.46 per share to three private equity entities including Standard Chartered Bank   valuing the Transmission Business at over Rs 3800 crs ! ~ that’s 313 % increase in Valuation in months from the de-merger valuation of Rs 112.30 per share ~ I had voiced a concern whether even this Valuation was done by the earlier valuing firms.It seemed clear to me that it was a premeditated play that deprived the minority shareholders of  STL of significant gains as they were seduced  to cash out from their entitlement in SPTL

Short Changing Minority Shareholders is nothing New in the listed Indian Equity Space  

On de-listing the Promoters obviously want the lowest price which can be manipulated so that even the SEBI Pricing Formula is taken care of

Essar Oil tried to do it at a floor of Rs 108 in 2014 and I raised Hell in several blogposts in 2014 and 2015  here  and was even quoted strongly in leading business publications. The Ruia Family ,Promoters of Essar Group , are no strangers to controversy .In the case of Essar Oil they  had grossly undervalued and even not disclosed the price that they had or were negotiating with Rosneft of Russia to buy out Essar Oil later ! ~ even Exchanges had given the green signal until SEBI stopped the process and when allowed at a new floor of Rs 146.05 put in a caveat that if the Rosneft price was higher than the successful Discovered Price the differential will have to be paid to the selling minority shareholders~ Essar Oil finally got delisted at a discovered price of Rs 262.80 and an additional Rs 75.48 was paid to shareholders because Rosneft bought out Essar Oil at @ Rs 338 per share ~ Where was Rs 108 & where was Rs 338 ! ~ Shareholders got Rs 230 more per share ~ I distinctly remember post the SEBI allowing the de-listing at a new higher floor price I was mentoring a Training class at the National Stock Exchange and had showcased Essar Oil as a Case Study for Valuation,Voluntary De-Listing as opposed to Compulsory de-listing  & Corporate Governance and at the time the share was quoted @ Rs 110 & I had asked the Class to conclude what should the Investing Action be to make the point ~ it’s better to be prepared and not get an opportunity than to get one and you don’t know what to do !

So who’s on the Board of Directors of Vedanta Ltd

March 2020 saw some very interesting notifications to the Exchanges when Vedanta Ltd announced the departure of it’s CEO and Board Member Srinivasan Venkatakrishnan from April 2020.He had barely served Vedanta for thirteen months , from March 1,2019 and had given a very cheerful CEO Report in the Annual Report of FY 19 ~ says he left for personal reasons to go back to his family in South Africa ~ would be interesting to know the real reason .

Incoming on the Board from April 1,2020 is the face and founder of the Vedanta Group,Anil Agarwal who’s been designated as the Chairman with his Brother ,Navin Agarwal being moved to Vice Chairman

These are the Non Executive Independent Directors ,all leading names and  luminaries in their field, on the Board of Vedanta Ltd ~ I checked all notifications to see if any have resigned …none have …K Venkataramanan has got a special board approved extension for a year as he’s over the age of 75

K VENKATARAMANAN ~ Ex CEO & Managing Director, Larsen & Toubro Limited

UK SINHA ~ Ex Chairman, Securities and Exchange Board of India (SEBI)

AMAN MEHTA ~ Ex CEO Asia Pacific,HSBC  ~ occupies himself primarily with corporate governance

LALITA D GUPTE ~ Ex Joint Managing Director, ICICI Bank,Ex Chairperson, ICICI Venture
Funds Management Company Limited . Presently Chairperson of ICICI Lombard General Insurance Co Ltd

RAVI KANT ~ Ex Managing Director & Vice Chairman, Tata Motors

I urge all these Independent Directors to protect the rights of the minority shareholders and unanimously   veto this proposal of delisting at this indicative price of Rs 87.50 at  the Board Meeting on Monday,May 18,2020

Please can you’ll do that !?

Hope SBI Capital Markets, too who have just been appointed the Merchant Banker by Vedanta Ltd as is mandatory to do the due diligence on this proposal  also gives an honest, unbiased and fair due diligence report or categorically tell Vedanta Ltd that they need more time

Appeal  to Vedanta Group Doyen & Founder Anil Agarwal

In 2012 in a cover story with a Business Publication this is what Vedanta Group Founder Anil Agarwal had stated  :

“Two pieces of advice from my father have remained the guiding force of my journey. His first was to keep trying till one succeeded, but never at the cost of principles. The second was to be empathetic to the cause of the underprivileged.”

Mr Agarwal, your minority shareholders are the underprivileged here and need to receive empathy!  

You know that Rs 87.50 is not even near a fair exit price for minority shareholders of Vedanta Ltd

By all means simplify your Vedanta Group Structure and Operations by de-listing Vedanta Ltd but not by complicating  and creating corporate governance issues in this unfair opportunistic exit price of Rs 87.50 offered

If on Monday,May 18,2020 the Board of Directors indeed approves this voluntary de-listing proposal at the indicative price offered of Rs 87.50 then my respect for all the leading luminaries who are Independent Directors on the Board will have gone down a huge notch ~ even if they register an absence or avoid voting  at the meeting to avoid this controversy ~ they must influence the Promoters and Management on the Board to withdraw this proposal or raise the price significantly ~ or else register a dissent at the meeting ~ or if matters come to a head even resign as Directors

What will happen to the Share Price at Rs 92 levels currently

The Share Price of Vedanta Ltd will continue to monkey around with opportunity hunters and punters betting that all approvals will come for the  de-listing to take place from first the Board on Monday,May 18,2020 and then the Shareholders , SEBI and Exchanges and the final successful discovered  price which will be accepted by the Promoter Group will be much higher than the Rs 87.50 being offered now which will be the floor price

For the record the Share Price of Vedanta was for the most  @ Rs 160 in 2019 and even began 2020 at these levels before slumping late February and March 2020 to Rs 60 levels in this ongoing Covid-19 crisis before rebounding to Rs 90 levels. On May 12,2020, day of Notification for considering the de-listing Proposal the Price hit upper circuit on BSE of Rs 87.55 followed by another upper the next day at Rs 98.20 before declining to under Rs 90.Today a late surge in volume buying took it back over Rs 90

So  should one buy or average (many are holding a notional loss) at Rs 90 levels in anticipation of a de-listing at a much higher price ? What’s the downside risk if de-listing does not happen? 52 Week High /Low is Rs 180/Rs 60

That’s your Call ~ my only reason for this blogpost is to point out that Rs 87.50 as a de-listing indicative price is short changing the minority shareholders of Vedanta Ltd and given the history of the Vedanta Group I’m not surprised

Oh! Vedanta Ltd  also trades in the F & O Segment in Contract Size Lot of 3500 shares for May & June Contracts and 6200 shares for July Contracts ~ expect some action here too ! ~ if you are an addict or have that streak ! just ensure you don’t add a F & O crisis to this Covid-19 crisis that’s testing nerves

There’s controversy & major corporate governance issues plenty in the Vedanta Group with the Group mired in litigation in Zambia and in Tamil Nadu where the State Government has ordered permanent closure in April 2018 of the Copper Smelter

I just pray that the minority shareholders of Vedanta Ltd , proxy advisors advising big holdings, the exchanges and regulators and Ministry of Corporate Affairs don’t let the Vedanta Group get away with this De-listing at this price of Rs 87.50 like they did with the De-Merger undervaluation in Sterlite Technologies a few years ago or even when restructuring their Sterlite~Sesa Goa~Cairns~Balco companies internally and then finally into Vedanta Ltd  or even earlier in this millennium when they got Balco at a low price in a government disinvestment and acquired Sesa Goa or in 2002 when they used a tactic of putting the onus on the shareholder to return the option form duly filled and cheque send by a specific date if they wanted to continue holding the Sterlite shares or else it would be treated as if they accepted the cheque and the shares held were sold by them in an offer ~ sadly courts and SEBI did not support the shareholder then~ I’m not going there

May update this blogpost post the Board Meeting of Vedanta Ltd on Monday,May 18,2020

Readers are welcome to connect with me on [email protected] or +91-9820162597 for more clarity on this blogpost if you have not understood especially the Hindustan Zinc valuation ~ just don’t ask me to recommend to buy,sell or hold Vedanta Ltd at Rs 92 levels

Cheers,

Gaurav

Disclaimer : Neither my immediate Family nor me have any exposure in any Vedanta Group Company when writing this blogpost