Merger to strengthen financial performance of Vedanta Resources: S&P

The proposed merger of two Vedanta Resources firms, Cairn India with Vedanta Ltd, will improve the financial performance of the group company, global agency Standard & Poor's (S&P) said.

"In our view, the financial performance of Vedanta Resources PLC would gradually strengthen because of greater cash fungibility and improving cash flow adequacy and leverage after the merger," S&P credit analyst Mehul Sukkawala said in a statement.

"The merger is a step in Vedanta's group simplification process. We expect the proposed merger between Vedanta Ltd and Cairn India to be completed by the end of the first quarter of 2016 at the earliest," it added.

Vedanta Resources will benefit from access to the free cash flows that Cairn India will likely generate annually.

This should help improve the debt servicing capabilities and deleveraging efforts of Vedanta Resources and its Indian subsidiary Vedanta Ltd, S&P said.

"We expect the improvement in financial performance to lower the downside rating pressure on the company. But for now, the operating performance of Vedanta Resources' key businesses will remain the most important factor for the company's credit profile," Sukkawala said.

The ratings agency said it expects the free cash flows to be about $500 million in fiscal 2016 (year ending March 31, 2016) and increase to more than $800 million by fiscal 2018, given its base-case expectation of an increase in oil prices.

Vedanta Resources continues to consider various options to refinance its $2 billion maturities due mid-2016 by the end of 2015 alongside the merger process, it said.

"In our view, a more significant improvement in Vedanta Resources' credit profile continues to hinge on the operating performance of its individual businesses. Our base case considers a sizable improvement in aluminium production to result in better financial and operating performances," it added.

The proposed merger involves an equity swap, and will result in Vedanta Resources' shareholding in Vedanta Ltd. reducing to 50.1% from 62.5%.

The merger is subject to shareholder, legal, regulatory, and government approvals.

"Key among them are approvals from Cairn Energy PLC and Life Insurance Corp, which are Cairn India's largest shareholders after Vedanta Ltd, and India's income tax authorities," S&P said.