Mumbai, Feb. 25: Anil Agarwal-led Vedanta group is merging Sterlite Industries (India) Ltd into Sesa Goa in a major restructuring move aimed at creating a single holding company and one operating entity in the group.

Post merger, shareholders of Sterlite will receive three Sesa Goa shares for every five held by them.

The restructuring will also encompass the consolidation of Vedanta Aluminium or VAL into the new merged entity called Sesa Sterlite and the transfer of a 38.8 per cent shareholding held by group holding company Vedanta in Cairn India to the new entity. This apart, MALCO will be merged with Sesa Sterlite.

The merger will create a Rs 66,431-crore entity straddling across assets such as zinc, iron ore, oil and gas, copper, aluminium and power. It will be the world’s seventh largest diversified natural resources company by EBITDA (earnings before interest, tax, depreciation and amortisation).

Speaking to reporters here today, Anil Agarwal, chairman of the Vedanta group, said one of the key objectives behind the merger was to simplify the structure within the group.

“Whenever we went to investors, there was a huge demand to consolidate and simplify,’’ he said, adding that because of this latest exercise, there would be one holding entity (Vedanta Resources Plc) and one operating company — Sesa Sterlite.

Agarwal added that apart from simplification of the group structure, the merger will also lead to significant synergies of up to Rs 1,000 crore per annum. The transaction is expected to be completed this year.

While the merger of Sterlite into Sesa Goa was a bit of a surprise as the markets were expecting the latter to be merged into Sterlite, senior officials from the group hinted that this was partly because of regulatory requirements.

Sesa Goa, they said, held numerous leases and in the event of a merger with Sterlite, they would have to go through the entire process of seeking approvals for the transfer.

However, there was another surprise element that also brought some concerns to the fore.

The restructuring includes the consolidation of VAL into Sesa Sterlite. VAL is now a subsidiary of Vedanta Resources.

The worry here is that this merger will bring more debt into the books of the merged entity. Close to Rs 19,892 crore of gross debt from VAL alone will come to the books of Sesa Sterlite.

Moreover, while Vedanta will transfer its 38.8 per cent direct shareholding in Cairn India, the associated debt of $5.9 billion taken by Vedanta to finance the acquisition of Cairn will come to the new entity. After the transfer of Vedanta’s direct holding in Cairn India, Sesa Sterlite will have a 58.9 per cent shareholding in Cairn India.

The gross debt in the books of Sesa Sterlite is estimated to come to around Rs 66,717 crore, including the existing debt of Sesa Goa and Sterlite. However, after including cash and current investments, the net debt position of the merged entity is placed at Rs 36,936 crore.

Agarwal and his senior management team comprising P.K. Mukherjee, CEO of Sesa Goa, and Tarun Jain, group director (finance), however, averred that the jump in debt should be seen in the context of the world class assets that would come into Sesa Sterlite. For instance, VAL is setting up a 2.6-million-tonne integrated aluminium plant that also comes with a power unit.

“These assets are extremely difficult to replicate and the capital cost of setting up such an asset itself would have gone up,” Agarwal said.

Jain here added that the $5.9 billion debt had been raised at an attractive interest of 5.2 per cent and that the outgo on this would be only $500 million.

Analysts here opined that the transaction would be beneficial for Vedanta with its debt levels coming down because of the transfer.

“The restructuring was necessary, especially after the acquisition of Cairn India, because it was a large acquisition and they needed to do things in a much more organised way in India,” said Jagannadham Thunuguntla, head of research at SMC Investments and Advisors, in New Delhi.

While the restructuring will see the merger of MALCO, which is one of the largest power suppliers in Tamil Nadu, with Sesa Sterlite, Sterlite Energy and VAL’s aluminium business will also be merged into the consolidated entity.

Responding to queries, Agarwal said the group was looking to acquire coal assets and that it intended to participate in the auction of large coal blocks in the country.

Value accretive

This is the group’s second effort to overhaul its structure. A similar exercise in 2008 was aborted after investors opposed the plan.

On Saturday, Vedanta sought to reassure its minority shareholders by saying the restructuring would be earnings-accretive in the first year itself.

The group expects cost savings of $200 million a year from the restructuring, vice chairman Navin Agarwal told analysts in a conference call.

Ahead of the announcement, shares in Sterlite, valued at $7.9 billion, closed 3.1 per cent higher in a weak Mumbai market on Friday. Shares of Sesa, valued at $4 billion, closed down 0.2 per cent.