Merger between Sesa Goa and Sterlite Industries

The proposed merger between Sesa Goa and Sterlite Industries, aimed at creating a mega natural resources firm from India, has moved a step closer towards realisation with the nod from the Madras High Court today.

"The proposed Merger of Sterlite and Sesa Goa and Vedanta Group Consolidation has received the approval of the High Court of Madras on July 25, 2013 and the approval of the High Court of Bombay at Goa on April 3, 2013," Sterlite said in a statement.

As per the merger scheme, Sterlite will be merged into Sesa Goa and a new entity Sesa Sterlite will be created post merger. All other subsidiaries of Vedanta, except Konkola Copper Mines, would be controlled by Sesa Sterlite after completion of the process. 

The merger would create seventh largest natural resources company of the world (in terms of Earnings Before Interest, Taxes, Depreciation, and Amortisation) and a cost saving of Rs 1,000 crore annually, Vedanta had said earlier.

The merger scheme has already been approved by most of the regulatory authorities, including Goa bench of the Bombay High Court, the Competition Commission of India, BSE and NSE. Shareholders of Sterlite and Sesa Goa have already given their approval in June, 2012.

A glitch in realising the merger is a review petition filed by a shareholder of Sesa Goa in the Bombay High Court, challenging the court order. However, Sterlite said "hearing before the Division Bench (of Bombay High Court at Goa) has been completed and the order of the Division Bench is awaited."

Post merger, Vedanta would hold 58.3 per cent stake in Sesa Sterlite. As per the scheme of arrangements, Sterlite shareholders would get three shares of Sesa Goa for every five shares held according to the swap ratio. This is second restructuring exercise being attempted by Vedanta Resources as the first one in 2008 had failed due to objections raised by some minority shareholders over valuation of a group firm, Konkola Copper Mines. Cairn India, Hindustan Zinc, Balco, Vedanta Aluminium, Madras Aluminium, Talwandi Sabo Power and Australian Copper Mines will become subsidiaries of Sesa Sterlite after the restructuring. The restructuring would lead to Vedanta's debt burden on a standalone basis falling to around USD 3.8 billion. 

However, Sesa Sterlite, the new entity, would end up with a total debt of about USD 14 billion. Shares of Sesa Goa fell by 2.24 per cent to close at 139.95 apiece on the BSE and the Sterlite scrip closed down 2.07 per cent at Rs 80.30.

Private Equity Investment

Meaning:

Private equity is a form of equity investment into private companies that are not quoted on a
stock exchange. It can be through both domestic and international route.

The following are the different ways through which a Private Equity Investment can take place.

Leveraged buyout

This, refers to a strategy of making equity investments as part of a transaction in which a company, business unit or business assets is acquired from the current shareholders typically with the use of
financial leverage.

Benefits to the investor

(1) the investor itself only needs to provide a fraction of the capital for the acquisition, and
(2) the returns to the investor will be enhanced (as long as the return on assets exceeds the cost of the debt)

Growth capital

It, refers to equity investments, most often minority investments, in relatively mature companies that are looking for capital to expand or restructure operations, enter into a new market or finance a major acquisition without a change of control of the business

Mezzanine capital

It refers to the sub-ordinate debts or the preferred equity securities that often represent the most junior portion of a company's capital structure that is senior to the company's common equity.

Venture capital

Investment made in the equity of a company for particular venture is called a venture capital. Ie. for the purpose of starting up a company, development of the company , or for the expansion of a business or for any other like manner.

Steps involved in Private Equity:

- Identifying the need and purpose of PE
- Understanding the institutional investor’s interest in the deal
- Analyzing the risk involved.
- Carrying on a complete Due diligence
- Formulating and executing the legal documents.
- Exit

Important documents:

- Investment agreement
- Articles of association
- Service agreements
- Acquisition
- Finance related agreements

Arbitration Clause:

- The arbitration clause should be in the interest of the Company.
- It should clearly state the place of arbitration, the law that would be applicable and the process of selection of the arbitrator.
- Appeal - ability of the Final award.
- Method to be adopted in case of international transactions
- When an arbitration clause is available the parties to the contract have to approach an arbitrator initially and not the civil court, however there are exemptions to it.

Arbitration can be an effective means of dispute resolution, and may sometimes be preferable to litigation, but parties to a potential dispute should consider its benefits and limitations before agreeing to resolve their dispute through arbitration.

Exit:

The following are the methods through which the exit of the private equity can take place.

Successful exit:

o listing on a recognised stock exchange; (IPO)
o sale of New co to a trade purchaser; or
o Merger
o Going in for restructuring, or issue of special dividends or redemption rights.

Unsuccessful exit:

o the insolvency and winding-up of Newco;
o the sale of the investor's shareholdings to management or to Newco on a purchase of own shares, often for a low price; or
o a restructuring and transfer of equity to the bank(s) or mezzanine lenders who then try to sell the business.