Vedanta Resources restructures its businesses to create a world top 10 resource company.
The City has never really taken to London-listed Indian mining group Vedanta Resources (LSE: VED). Despite being a FTSE 100 company, Vedanta seems to be widely perceived as not quite a bona fide blue chip. As such, it has been persistently valued at a discount to peers such as BHP Billiton (LSE: BLT) and Rio Tinto (LSE: RIO).
The controlling interest of the Agarwal family, wrangles with government and provincial authorities, and last year's bold acquisition of a majority stake in the Indian subsidiary of oil and gas group Cairn Energy (LSE: CNE) have all contributed to negative sentiment towards Vedanta.
Probably the single most important factor, though, is that, in the eight years since the company's flotation, City investors have simply struggled to get their heads around its complex and confusing structure.
However, following media speculation last week of a potential group restructuring, Vedanta announced detailed plans on Saturday for a consolidation of its businesses, following up with a UK press release this morning.
Seventh wonder of the resource world
Vedanta is proposing to merge its Indian subsidiaries into a single entity. Non-ferrous metals producer Sterlite Industries will merge with iron ore miner Sesa Goa. Two aluminium units, together with Vedanta's holding in Cairn India (and associated debt of $6bn), will also be transferred to the merged company.
The new entity, to be called Sesa Sterlite, will become the world's seventh-largest natural resource company -- notionally capitalised at around $22bn -- and Vedanta will own 58% of the shares.
In addition to simplifying the group, the proposed plans are expected to produce cost savings of $200m per annum and the new capital structure will boost Vedanta's credit rating. Directors and shareholders will also be expecting the market to start valuing Vedanta more in line with its peers and for the shares to rate accordingly.
Blue-chip Vedanta?
When I last wrote about Vedanta, in November, I suggested it would be a very interesting bet if the shares fell below £10. They dipped under that level a couple of times before the year was out but, unfortunately, I didn't take my own advice.
The shares have soared this year, and are up a further 3% this morning, changing hands at around £15.50 in early trading.
Is Vedanta, nevertheless, still a good bet today because of the recent developments? Assuming the restructuring gets the seal of approval from shareholders and regulators, I think much will depend on how far institutional investors are prepared to go in affording the streamlined company real blue-chip status.
Certainly, though, I don't expect Vedanta's shares to see £10 again any time soon!
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> The Motley Fool owns shares in BHP Billiton.
