Vedanta should make a more meaningful delisting offer

During the week, Vedanta announced plans to delist the stock from the Indian bourses by offering shareholders a price of Rs.87.50. How good is the offer and why Vedanta must better this offer?

Why delisting now?

 Most investors would recollect that the Vedanta promoters had earlier got their UK based holding company, Vedanta Resources PLC, delisted from the LSE in 2018. They have seen delisting as part of the simplification of group structure, which is fine. Agarwal, perhaps, also realizes that in the volatile commodity business, multi listings were becoming a liability. Apart from the stringent listing regulations, the stock prices are also influenced by the market fluctuations and the liquidity position. That was creating unnecessary strain on Vedanta.

Price and cycle

The business logic of the delisting call is hard to miss. Firstly, there is the price angle. Global commodity prices have corrected sharply in the last one year post-COVID and that has made the stock exceedingly cheap. Delisting the stock and buying out the minority shareholder gives a sense of assurance to the market that the promoters are going the whole hog. Secondly, commodity cycle may be ripe for a shift if the post-COVID stimulus bears fruit. That would give Agarwal family control over the business at a very low cost.

Why the price is unfair?

There is no questioning the decision to delist. With 51% ownership of Vedanta, the promoters are perfectly entitled to that decision. The debate is over the price. Vedanta PLC was delisted at a 27% premium to the market price and very close to the 52-week high. By that definition, the price offered must be closer to Rs.170. Secondly, Vedanta group has a cash reserve of Rs.35,000 crore. Valuing the entire company at just Rs.33,000 crore (implied in the offer price) is clearly unfair to the minority shareholders.

Lastly, the delisting would mean that the huge dividends of Hind Zinc need not be shared. That is not factored in. If the merger with Hind Zinc goes through, then Vedanta virtually has access to unlimited cash.

Pay up the control premium

At the current offer price of Rs.87.50 per share, Vedanta Resources is clearly getting the India business for a song. It is time for the group to pay reasonable control premium for the stock. That is more so; considering that most of the businesses of Vedanta are virtual cash cows. As per SEBI regulations, if the promoter is able to get more than 90% of the shares, it can force delisting. With promoters holding 51% and with large institutional holdings, that may not be too tough. Vedanta has had negative vibes on corporate governance in the past. It is time to be counted!