Proxy advisory firm Stakeholders Empowerment Services (SES) has come out with a detailed report advising Vedanta’s minority investors to “not be guided by what is floor price, what is book value given, what is market price or what is their purchase price.”
The SES report advises that shareholders should consider Vedanta’s business valuation and its future prospects, for which the company’s promoters are keen to delist.
The report reasons "Just remember one thing that, you must offer shares at a price which you feel is fair. Please also do not be afraid that if you offer a higher price and delisting happens at a price lower than what you offered, you may be left out… SEBI Delisting Regulations guarantees that the acquirer must offer to buy shares from all remaining shareholders at discovered price in case delisting offer is successful. Therefore, do not under bid for ‘Fear of Missing out’ (FOMO).”
The controversial Vedanta delisting bidding starts today, 5th October and closes on the 9th October. The eight-page report goes on to dwell at length on what is the ideal bid price.
The report recommends a 129%-186% premium to the indicative offer price set by Vedanta Ltd to buy back shares for delisting from stock exchanges thus pegging Vedanta’s fair delisting price at Rs236-Rs310 per share.
Billionaire Anil Agarwal’s London-based Vedanta Resources is in the process of taking Mumbai-based Vedanta (a commodities conglomerate) private for 'corporate simplification'.
Vedanta promoters hold a 50.14% stake and have announced plans to buy out the remaining 48.94 % shareholding at a floor price of Rs87.50. The company needs to buy back just over 25% of the public shareholding to take its stake over 75% after which it can be delisted. Sucheta Dalal, managing editor at
Moneylife, had earlier written
in her column about how the Vedanta promoter is capitalising on market distress and investors’ anxiety about a looming recession, to take his Indian company, Vedanta Ltd, private.
The delisting process became controversial because as SES points out, the promoters 'have tried many tricks' to keep expectation of public shareholders depressed, including keeping a low floor price (Rs87.25), writing off Rs17,400 crore resulting in consolidated book value to be less than Rs90 and they did not even pass the dividend of Hindustan Zinc (a subsidiary company) to shareholders, although promised in dividend distribution policy (DDP).
The report recaps that Vedanta has an unpaid HZL dividend of Rs12.18 per share which promoters have not passed on to shareholders. In May, HZL paid around Rs7,000 crore as dividend, of which, Rs4,500 crore was received by Vedanta. The report adds “A crown jewel of Vedanta is the cash-rich Hindustan Zinc Ltd (HZL), which needs more attention. Its market capitalisation is over Rs85,000 crore and its embedded value in Vedanta is Rs55,000 crores, translating into Rs148 per equity share or 70% higher to the (current delisting) floor price and 65% higher to the book value.”
The SES report recommends “Even if one offers a discount to highest price for uncertainties, depressed economic environment, etc. and gives a discount of 20%-30%, the fair range comes to be anywhere between Rs200 and Rs250 at least considering the value that is seen in the business.”
Going by this proxy advisor’s report, Vedanta shareholders might drive a hard bargain in the company's delisting offer.
Earlier in May 2020, another shareholder advisory firm Institutional Investor Advisory Services
(IiAS) had in its note called this delisting move 'opportunistic' and said that the indicative offer price (Rs87.50) does not reflect the fundamental value of the equity." IiAS had said then that the promoters will have to offer a significantly higher exit price if the bid is to succeed.
In June 2020, Vedanta reported a massive quarterly loss (attributed to a write-off of Rs17,132 crore on impairment of assets in oil and gas, copper and iron ore businesses).
The market was unperturbed by the Rs17,132 crore write off in June as it is a book loss and does not impact the cash flow.
The group is following its usual old pattern of creating a 'negative sentiment' to induce shareholders to offer their shares at throw-away prices, as per SES.
The SES report says “It is age old technique that if you want to buy something, first undervalue and then create negative environment so that seller is convinced that the thing is not valuable, here shareholders are motivated to tender their share at throw away price. Already news items have started appearing about likely price of delisting, as if the newspapers know mind of investors. According to SES, fact is that the interested parties are probably revealing their mind through newspapers.”
SES argues that “shareholders must keep in mind that the promoters are buying back shares because they believe in future of the company. Each Vedanta share has 0.74 HZL share embedded, which itself is valued at Rs145+, therefore minimum price is Rs145, if one takes all other Vedanta assets at zero, which is not the case.”
The SES report further justifies, “Vedanta shares are traded at holding company discount of HZL shares. Otherwise, why would Vedanta trade at less then embedded price of HZL? Ideally Vedanta can remove holding company discount of HZL share by de-subsidiarization. Presently Vedanta would not want to de-subsidiarize HZL, as Promoter’s equity would reduce to close to 32.5% (64.5% in HZL will gets distributed amongst promoter and public almost equally) and with Govt holding 29.54% and LIC holding 1.97%, promoters would lose edge. Therefore, post delisting if HZL is hived off Promoters would own close to 65%, thus giving them direct control, removing holding company discount” .
SES reiterated “Lastly, HZL dividend of close to Rs12/- share of Vedanta at a yield of 5% post tax (25%) itself gives a price of Rs180/- share, without valuing other business. If one adds remaining business total value will move up.”
Earlier in an interview to ‘
The Economic Times’, SES Founder and
MD JN Gupta had sought to remind investors that “if investors do not participate in the delisting offer then the promoter will never be able to reach the 90% threshold and delisting will not happen. So it all depends on whether the investors are offering shares for delisting or not and at what price they are offering.”
Vedanta’s main businesses include zinc, aluminum and oil and gas and apparently some of these have been affected due to the coronavirus pandemic. It posted a 23.5% drop in quarterly profit.
As per news reports, Vedanta Resources is in talks with banks for a further US$600 million to finance the delisting after already securing US$3.15 billion in loans and bonds.
First and foremost, investors should understands intrinsic value of HZL CANNOT be embedded in Vedanta stock because HZL itself is a listed company. The only value that Vedanta can draw from HZL is the expected dividend and any other income that that HZL pays out to its shareholders. This is a big difference.
Most credible advisory firms like ICICI, CLSA, Motilal Oswal, Citibank have pegged the value between Rs. 120-150 for the company, based on the debt situation, risk profile and market outlook for the company.
2. HZL is a listed company and Vedanta owns part of it. That\'s why dividend given by HZL flows down to Vedanta shareholders. It is not just intrinsic. It is proportionate to the ratio of shares owned. How the dividends should flow down the channel is laid down in their rules.
3. You are playing the too big to make mistakes card. Lehmann Brothers, AIG, ML were much bigger financial institutions than ICICI, CLSA. This week Citibank USA is paying fine for tampering with risk data. ICICI ex-chief is behind bars. Marquee has got nothing to do with their activities.