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Sterlite, Sesa Goa Decline on Vedanta Debt Concern: Mumbai Mover

Sterlite Industries (India) Ltd. and Sesa Goa Ltd., which agreed to combine, dropped in Mumbai trading on concern their finances may be weakened by the debt they are taking on from parent company Vedanta Resources Plc.

Sesa, India’s largest iron-ore exporter, slumped 10.1 percent to 203.85 rupees, the most in more than two years, at the close of trading in Mumbai. Sterlite, the nation’s largest copper producer, fell 2.5 percent to 115.70 rupees. The key BSE India Sensitive Index fell 2.7 percent. London-listed Vedanta rose as much as 4.3 percent to 1,564 pence, the highest intraday level since Aug. 4, and traded at 1,519 pence as of 11:32 a.m. local time.

Investors will get three Sesa shares for five shares of Sterlite and Sesa Sterlite, the new company, will absorb $5.9 billion of Vedanta’s debt as part of the merger agreement. Moody’s Investors Service on Jan. 12 cut Vedanta’s bond rating and maintained a negative outlook following the company’s $8.67 billion acquisition of Cairn India Ltd. in December, which pushed the total debt of the group to $9.65 billion.

“There’s only one clear winner -- parent Vedanta -- as it gets free of the debt it took to buy Cairn India and fund the spending for unit Vedanta Aluminium,” said Niraj Shah, an analyst at Fortune Equity Brokers India Ltd. in Mumbai. “The merger is negative for Sesa and even for Sterlite.”

Sesa will absorb Sterlite in an all-share deal, London-based Vedanta, controlled by billionaire Anil Agarwal, said in a Feb. 25 statement. Vedanta will transfer for a token $1 its 38.8 percent holding in Cairn India to Sesa Sterlite, which will hold 58.9 percent of Cairn India.

Aluminum, Cairn India

Vedanta Aluminium Ltd., the Indian aluminum unit in which Vedanta owns a 70.5 percent stake, and Madras Aluminium Co. will also be consolidated into the new company, according to the statement. The transfer of Cairn India shares won’t be conditional on the merger of Sesa, Sterlite, Vedanta Aluminium and Madras Aluminium, according to the statement.

Vedanta’s debt will fall 61 percent to $3.8 billion and the debt-service cost will be reduced by $300 million for the year ending March 31, 2013, the company said in a presentation after announcing the merger. Cairn India’s debt, which bears an annual interest cost of 5.2 percent, will continue to be guaranteed by Vedanta, Group Chief Financial Officer Tarun Jain said Feb. 25 at a media conference in Mumbai.

Sesa Sterlite will have a net debt of $7.5 billion and an average interest cost of 8 percent, Jain said. Capital spending will be $6 billion in the next three years, he said.

The merged entity, in which Vedanta will hold a 58.3 percent stake, will help save $200 million annually, Navin Agarwal said on the conference call. The merger will probably be completed this year, he said.

“Sesa Sterlite will be one of the largest global diversified natural resources majors,” Chairman Anil Agarwal said Feb. 25 in the e-mailed statement. “This transaction is a natural evolution, leading to simplification of the group’s structure.”

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