Indian conglomerate Vedanta to break up as debt crunch looms

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Indian tycoon Anil Agarwal is pressing ahead with a plan to break up his energy and mining conglomerate into six companies, betting that the move will raise the valuation of a business empire trying to stave off a debt crunch.

Vedanta said on Friday that it will split into six units — aluminium, power, base metals, steel and ferrous metals, oil and gas — in a sweeping shake-up of one of India’s biggest natural resources groups.

Mumbai-listed Vedanta will hold the group’s semiconductor and display manufacturing businesses, as well as Hindustan Zinc, a highly profitable subsidiary.

The company believes the separate entities will command higher valuations given the conglomerate model has fallen out of favour among investors.

“Under the banyan tree, a small tree grows slowly,” Vedanta chair Agarwal told the Financial Times. “If you can make them separate, they can grow at their own speed.”

Shares in Vedanta climbed 7 per cent on Friday, but the stock remains down almost 30 per cent so far this year. 

Omar Davis, Vedanta head of strategy and a former executive at Bank of America, said: “By creating these investment vehicles, effectively we’re catering we think better to the markets’ desire for investibility into the India story, or the China plus one story.”

“From a capital allocation perspective and even a management perspective, it was becoming harder and frankly unwieldy to operate the businesses as a conglomerate,” he said, adding that the process would take between nine and 12 months to complete. 

Vedanta also has businesses in Africa, and is India’s largest supplier of aluminium, a metal used in cars, planes and drink cans. It is also a large producer of fossil fuels and copper.

The shake-up comes a month after Agarwal, a former Mumbai scrap metals trader, said he was considering abandoning the conglomerate model given investors’ growing preference for “pure play” stocks. 

Explaining how his role would change, Agarwal told the FT that he would “be more of an active investor to oversee all these companies, to make sure they do well”. There is a “very incentivised management in place, they’ll be the owner and they’ll have skin in the game,” he said.  

The redrawing of Agarwal’s empire comes as Vedanta Resources, the holding company that owns the majority of Vedanta Limited, has approached bondholders to renegotiate the more than $3bn of debt that is coming due in the next 18 months.

JPMorgan and Standard Chartered have been sounding out bondholders on behalf of the company on a potential debt exchange, according to people familiar with the matter, which would see lenders roll into new bonds while getting some cash repayment upfront.

But credit rating agencies have been unimpressed. Moody’s downgraded Vedanta further into junk territory this week, citing a lack of “meaningful progress on refinancing its upcoming debt maturities”. Standard and Poor’s axed its rating on Friday.

Talks with bondholders have been “constructive”, Davis said, but declined to explain the terms that had been discussed. “Is any single one of them concrete today? No,” he said.

He insisted the decision to break up the conglomerate and refinancing negotiations were not linked, but said that the demerger would eventually be “credit-enhancing” for bondholders, as the separate entities would likely be able to raise cash more easily. 

Including dollar and rupee-denominated bonds, plus a financing facility from Howard Marks’ Oaktree Capital Management, Vedanta has to pay back close to $6.2bn in the next 18 months, said Lakshmanan R, senior research analyst at Fitch-owned credit research firm CreditSights.

He was sceptical, however, that splitting up the businesses would raise the valuation of the businesses.

“Investors know about Vedanta, they know about the refinancing risk,” said Lakshmanan. “So how much more additional valuation could be realised from its current valuation? It’s also a bit doubtful.”