Sesa Goa's V S Dempo buy out comes at a cheap valuation 22 Jun 2009, 0506 hrs IST, Santanu Mishra, ET Bureau
Many a firm has taken a hit as demand beat a hasty retreat ever since the global financial slowdown washed up at Indian shores in September 2008. The accompanying credit crunch meant that those with cash reserves can now go cherry-picking with a slew of firms available at a relatively lower valuation. Iron ore mining major Sesa Goa’s story is on the same line. Sitting on a cash pile of little more than Rs 4,000 crore, the Vedanta Group firm didn’t have to think twice when another Goan mine called V S Dempo (VSD) came its way. Sesa Goa acquired VSD for Rs 1,750 crore on a debt-free and cash-free basis including a net working capital of Rs 145 crore. This is an all-cash deal and to be financed through the internal accruals of Sesa Goa, and at a time when the commodity cycle has reached the trough, the acquisition appears to be timely, cheap and synergetic. Business: Exports form the mainstay of Sesa Goa, with China as a major client. It sells iron ore in spot market and export accounts for around 90% of its revenue. However, VSD has an almost 50:50 mix of spot and long-term contract sales. It has a long-term contract with Japanese steel maker, Nippon Steel, to supply one million tons of iron ore every year. Sesa Goa sold around 15 million tons of iron ore in last fiscal year whereas VSD reported a sales volume of 4.4 million tons. Going forward, Sesa Goa expects to maintain a 22% organic growth rate and along with this acquisition, the total growth rate in annual sales volume would be in the range of 40-50% next year. Financials: VSD reported net sales of around Rs 976 crore during fiscal year 2008-09 and this will add around 20-25% to the Sesa Goa’s consolidated annual revenue. The operating margin of VSD is in the range of 43-45%, which is little lower than Sesa Goa’s operating margin of around 50-52%. However, this can be improved considering the Sesa Goa’s higher economies of scale in operation and synergy in logistics and transportations between the two entities. The Sesa Goa doesn’t have any debt on its balance sheet and the current acquisition is also not going to bring in any debt. This would provide sufficient room for Sesa Goa to go ahead with capex plan to increase its mining capacity. Synergy and growth opportunities: The new acquisition will bring in 70 million tons of iron ore reserve, thus taking Sesa Goa’s total reserve to 310 million tonnes. Both the entities have significant operations in Goa and their mines are located close to each other. This would help in reducing the operating costs related to mining by optimal utilization of plants and machinery and transportation vehicles. After acquisition, Sesa Goa’s existing transshipping capacity would almost double. Also, VSD’s current mining capacity seems to be underutilized and can be exploited to the fullest after acquisition. Valuation: The current acquisition has valued VSD at $5.3 per ton of its mining reserve and resources. This is relatively cheaper considering the fact that Sesa Goa itself is valued at an enterprise value of $9.3 per ton of its mining reserve and both of them have almost similar quality assets. At the current production rate, the mining reserve of VSD will last for another 15 years. The iron ore prices seem to have reached the bottom and one can assume the current operating margin of VSD to sustain in coming years. In that case, Sesa Goa would be able to recover its investment in next 5-6 years from the operating cash flow of VSD. Finally, Sesa Goa has been sitting on a huge cash reserve and it makes more sense for it to invest in businesses where returns are higher. The cash flow yield from the current acquisition turns out to be around 18-20%, which is definitely much higher than the return generated from treasury operation. Considering all these facts, we believe that current acquisition is going to be beneficial for the Sesa Goa and longterm investors can consider accumulating this stock further. Risk: Both the companies derives significant portion of their revenues from spot sales and any further downfall in iron ore prices would hurt the profitability. Also, like any other acquisition, it is subject to successful integration of operations of both companies. http://economictimes.indiatimes.com/Features/Investors-Guide/Sesa-Goas-V-S-Dempo-buy-out-comes-at-a-cheap-valuation/articleshow/4685596.cms * * * Vedanta arm to buy Dempo's biz 12 Jun 2009, 0028 hrs IST, Reeba Zachariah, TNN MUMBAI: Anil Agarwal's shopping spree continues. Even as the pursuit for Arizona-based copper firm Asarco is on, Agarwal has sealed a deal back home. Sesa Goa, a subsidiary of Agarwal's Vedanta Resources, is buying the Dempo group's oldest and most priced asset its mining business in Goa for Rs 1,750 crore in an all-cash deal. A few months ago, the Dempos separated the mining business and investment portfolio from the holding company, V S Dempo & Co (VSD), to make way for a new investor. Though the earlier plan was to rope in financial investors, the Dempos changed their mind after Sesa Goa made an attractive offer, a source said. Interestingly, two years ago, Vedanta sprang a surprise by emerging as the highest bidder for Mitsui's 51% stake in Sesa Goa for $981 million, beating ArcelorMittal, the world's largest steel company, and Aditya Birla group. Sesa Goa marked Vedanta's entry into the iron ore segment. Iron ore is a major raw material in producing steel, a key metal used to manufacture automobiles and refrigerators. Since ore deposits are found in only a few countries India's deposits are among the largest in the world the VSD acquisition consolidates Vedanta's position. While the Dempos are exiting the iron ore business in Goa, they have decided to keep their mining interests in Maharashtra and Jharkhand. For Sesa Goa, India's largest private sector iron ore exporter, the deal brings in synergies between the two units. Sesa Goa is funding the acquisition from its existing cash resources, which stood at Rs 4,413 crore as on March 31, 2009. "We are delighted at this opportunity to consolidate the iron ore business in Goa and integrate Sesa's & VSD's operations and achieve greater synergy," said Vedanta chairman Anil Agarwal. Ambit Corporate Finance advised the Dempo group on the deal. Dempo chairman Shrinivas Dempo said, "We are pleased with this agreement with Sesa Goa which will ensure long term sustenance of VSD's operations." Sesa Goa is now acquiring VSD, which owns and has the rights to mining reserves of about 70 million tonnes of iron ore for 17 years. VSD has 19 mines in Goa. In addition, Sesa Goa is acquiring VSD's related infrastructure like processing plants, barges, jetties, trans-shippers and loading capacity at Mormugoa Port, under Dempo Mining (100% subsidiary of VSD) and Goa Maritime (50% held by VSD). VSD, which has been mining iron ore for 60 years, has revenues of Rs 976 crore with an EBITDA of Rs 417 crore in 2008-09. Sesa Goa reported a net profit of Rs 1,995 crore on revenues of Rs 5,183 crore in FY09. Of the 4mt of iron ore produced every year, VSD mainly exports to China, Japan and Hong Kong. Iron ore prices have been up in recent times to $55 due to rising demand from China. The Dempos intend to utilise the proceeds from the sale of VSD in strengthening their other business interests spanning across calcined petroleum coke, ship-building, food and travel. The group's only listed entity, Goa Carbon, is the second largest calcined petroleum coke (CPC) in the country after Rain Calcining. http://timesofindia.indiatimes.com/Business/India-Business/Vedanta-arm-to-buy-Dempos-biz/articleshow/4646333.cms * * * Moody`s assigns Ba1 to Vedanta Resources India Infoline News Service / Mumbai Jun 18, 2009 08:56 The rating follows the acquisition by Vedanta`s subsidiary Sesa Goa of the mining assets of the Dempo Group for US$368 mn Moody's Investors Service has affirmed the Ba1 corporate family rating and Ba2 senior unsecured rating of Vedanta Resources plc. The outlook on the ratings is stable. The rating follows the acquisition by Vedanta's subsidiary Sesa Goa of the mining assets of the Dempo Group for US$368 mn; Vedanta's offer to increase its shareholding in Sesa Goa from 53.1% to 55% for around US$120 n; and Vedanta's issuance of a US$1.25 bn convertible bond. "The acquisitions at Sesa Goa level are relatively small in their actual amounts as compared to the group's size, and are in line with the company's strategy to increase its iron ore capacity while streamlining the group structure by increasing shareholdings in those subsidiaries that it does not fully own," says Ivan Palacios, a Moody's AVP/Analyst. In Moody's view, Vedanta's US$1.25 bn convertible bond issuance improves the company's near-term liquidity profile. However, the convertible bond issuance and the drawings on the long-term project finance that Vedanta has recently secured will together increase the company's on-balance-sheet leverage -- which stood at US$5.1 billion as of FY2009 -- and weaken its credit metrics. "As a result of the aggressive expansion strategy, the incremental debt funding and the expectation of weaker near-term performance due to the challenging environment for base metals, Moody's believes that Vedanta's key financial metrics could temporarily exceed the tolerance level set for the rating", says Palacios. http://www.indiainfoline.com/news/innernews.asp?storyId=105120&lmn=1
