Vedanta taps Gulf funds, explores 10% stake sale in India unit

With debt repayments up to $2 billion maturing by June, billionaire Anil Agarwal-led Vedanta Resources Ltd (VRL) has reached out to investors for a strategic stake sale of up to 10% in India-listed Vedanta Ltd (VEDL), said people with knowledge of the matter. It’s also exploring the possibility of leveraging the cash flows of the domestic subsidiary and upstreaming the borrowed funds — moving them to the parent — via dividend payouts, they said. Vedanta has denied any stake-sale plans.

According to multiple sources aware of the development, Vedanta Resources has reached out to sovereign wealth funds (SWFs) and and alternative asset managers from the Gulf including Abu Dhabi’s Mubadala, ADQ, Bahrain’s Investcorp, and Saudi Arabia’s Public Investment Fund (PIF) for up to 10% dilution in the company, said people in the know. Abu Dhabi’s Sheikh Tahnoon bin Zayed al-Nahyan-led International Holding Company (IHC) has also been approached for a potential investment, they said.

Last week, senior representatives of the Vedanta Group met IHC executives in Abu Dhabi. Most of the SWFs have been lukewarm to the idea thus far, said the people cited above, except IHC that has a higher risk appetite. IHC had deployed $2 billion in three Adani Group companies last year, including flagship Adani Enterprises.


Lending issues
While potential investors want a primary infusion into the company, the Vedanta promoters have been seeking a premium for their shares.

However, these talks are at an early stage and may not lead to a transaction.

A 10% dilution at current market value would translate to Rs 10,086 crore ($1.23 billion).

A Vedanta spokesperson denied plans to sell stakes.

“We strongly deny approaching any of the funds/sovereign wealth funds to mobilise debt or equity,” he said in response to a detailed email query. “We are well positioned to meet our upcoming debt redemptions. Thus, any talk of Vedanta approaching funds to raise money is mere speculation and has no basis.”

IHC spokesperson Ahmad Ibrahim said, “These are market rumours which we don’t comment on; if anything of this nature, IHC will notify the market as per the governor’s rules and regulations.”

Mubadala, ADQ, Investcorp and PIF didn’t respond to queries. Bloomberg reported on Thursday morning that Agarwal was weighing a 5% stake sale in Vedanta as a last resort.

“Majority of lenders are not comfortable lending directly to VRL given its poor credit quality and have instead proposed to lend to VEDL which has reasonably strong cash flows,” said a person directly aware of the matter.

VEDL shareholders had approved the transfer of around Rs 12,587 crore from general reserves to retained earnings in October and it can borrow an equivalent amount to pay early dividends to shareholders, a second person said.

While such a move may be technically possible, it could lead to minority shareholders’ scrutiny, experts said.

“Investors would like to see what is the debt on the books of VEDL and its servicing ability of this debt. The additional debt should not increase the debt-equity ratio of the company to an unsustainable level,” said Shriram Subramanian, founder and MD of proxy advisory firm InGovern Research Services.

VRL has large repayments starting next month, including dollar bonds of $400 million in April and $500 million in May. It has another $1 billion bond maturing in January 2024. Apart from this, it has $1.1 billion term debt and $600 million in interest payments coming up besides $450 million of inter-company loans. It has predominantly been servicing debt through loans and dividends from operating companies such as Vedanta Ltd and Hindustan Zinc Ltd (HZL), the group’s cash cow.

“The recent weakness in VEDL stock price is driven in our view by renewed concerns on debt refinancing at the parent entity and the impact on VEDL,” said Varun Ahuja and Pinakin Parekh of JP Morgan. “In our view, as long as VEDL does not take any inter-company transaction with the parent VRL and all the cash flow upstreaming is via dividends, the minority shareholders do benefit from higher dividends.”

Vedanta Ltd shares have sunk 33% in the past year amid worries over parent VRL’s debt liabilities. Vedanta Resources, formerly a London-listed vehicle, owns 69.69% of Vedanta Ltd via various Agarwal family members and his promoter companies Twin Star Holdings, Volcan Investments and Finsider International Ltd among others.

HZL declared a dividend of Rs 26 per share on March 21, doing so for an unprecedented fourth time this financial year. With the latest interim dividend of Rs 10,983 crore, the company has now declared dividends of Rs 75.5 apiece for FY23, amounting to Rs 32,000 crore, the highest in its history.

The board of VEDL will meet on March 28 to consider a fifth dividend for FY23, the company announced on Thursday evening. The move can be seen as the company’s efforts to evacuate the proceeds received from HZL as dividend payout to VRL.

Vedanta Group’s bid to raise capital by selling its international zinc assets to HZL for nearly $3 billion has been stalled. This follows the opposition of the Indian government, the largest minority shareholder in HZL, which was privatised more than two decades ago.

Vedanta Resources has slashed net debt by $2 billion in the current financial year, the company said in a regulatory filing in February. It will continue to deleverage its net debt of $7.7 billion in the next two financial years, it added