Vedanta’s wriggle room narrows as creditors fret over demerger

But like the toothache that resurfaces after the painkiller’s effects have worn out, Agarwal’s problems are back. After Credit Sights flagged that the demerger could face major hurdles from minority shareholders and creditors, a Mint report confirmed that lenders to Vedanta were concerned about the lack of clarity on how their debt would be split among the various business units. The lenders consortium, whose consent is essential for the merger to go through, have appointed SBI Capital Markets to examine the demerger proposal. 

Add to these hurdles an administrative warning Vedanta received from the Securities and Exchange Board of India earlier this month.

It is now evident that the announcements of venturing into semiconductors followed by the demerger proposal were signs of a group in some financial distress. With a mountain of debt weighing him down, Agarwal used these announcements to buy himself time as well as elbow room from his creditors. The proposal to set up a semiconductor fab in collaboration with Foxconn, which came with the promise of generous government subsidy, did give Vedanta a boost and the group successfully restructured some of its near-term debt in early 2024. 

But the denouement was predictably anti-climatic. The joint venture with Foxconn was stillborn, with the Taiwanese company walking out after realizing that Vedanta wouldn’t be able to attract the technology partner needed to get the venture off the ground. 

Then emerged the second master plan six months ago, when the group announced its plan to split Vedanta into six listed companies. There was more shrewdness than strategy behind the move. After all, just over a decade ago, Agarwal had done the reverse, merging all his businesses into Vedanta with plans to take it private. The argument for the merger then was exactly the same as it is for the demerger today: unlocking value. 

Taking that at face value is a bit hard. 

The Credit Sights report warns that the demerger “will not fundamentally and significantly address VRL’s (Vedanta Resources Ltd) ability to service its debt obligations, and would in fact complicate VRL’s corporate structure, something the company has spent a decade simplifying”.

Indeed, Vedanta’s big worry now is tackling lenders’ reservations about whether the demerger could result in companies having weaker credit profiles than the combined Vedanta Ltd.

Assuaging creditor concerns may not be the only hurdle Vedanta faces.

Getting shareholder approval for the plan could be a challenge. Minority shareholders might oppose the move over concerns that the demerger process could undervalue their stakes in certain businesses.

Even assuming that the demerger exercise goes through eventually, running six separate entities would present operational complexities in terms of planning and execution. It would also test the group’s management bandwidth. 

Vedanta will also be left to contend with the integration of Hindustan Zinc Ltd, which had to split into two entities on hold after objections from the government, which owns a 29.54% stake in the company. How this integrated entity will co-exist with the other independent businesses is a question mark.

Of course, finally, the success of the demerger will have an impact on how the stock market reacts. If the new companies don’t perform well after listing, it could erode shareholder value. Demergers can be a powerful tool for corporate restructuring but reports estimate their failure rates range from 30% to 50%.

While Vedanta hopes that the demerger will unlock value for shareholders, it’s a complex undertaking with inherent risks.