Vedanta launches CB to fund acquisitions

London-listed Vedanta Resources launched a $1.25 billion convertible bond issue on Friday, one day after its subsidiary Sesa Goa bought the mining assets of Goa-based Dempo Group for $368 million.

Mining and metals group Vedanta on Friday evening launched a $1.25 billion convertible bond issue, upsized from $1 billion announced earlier in the day. The CBs, which are due 2016, will have a coupon of 5.5% payable semi-annually and will be convertible into ordinary shares of Vedanta at a conversion price of $36.48. The price represents a premium of 35% to the volume-weighted average price (VWAP) on the London Stock Exchange between launch and pricing, and a 46% premium to the 30-day VWAP.

"The company intends to use the net proceeds of the offering to support its organic growth pipeline, to increase its ownership interest in its subsidiaries and for general corporate purposes," Vedanta said in a statement filed with the LSE. "The net proceeds will also provide the group with additional flexibility to finance acquisitions."

Vedanta added that existing shareholders would receive priority allocation of the CBs, but its major shareholder, Volcan Investments, would not participate in the transaction.

J.P. Morgan Cazenove is the sole bookrunner for the CB issuance.

Vedanta also said on Friday it will buy 33.3 million shares of Sesa Goa for an estimated outlay of $120 million. Vedanta's equity ownership of Sesa Goa will increase to 55% after the new shares are issued, from 53.1% currently. The capital-raising is in accordance with the guidelines of India's securities regulator, SEBI, and is subject to shareholder approval at a forthcoming extraordinary general meeting of Sesa Goa scheduled for July 9, 2009.

Sesa Goa said on Thursday that it has entered into a share purchase agreement to buy all the outstanding shares of VS Dempo -- a holding company which owns 100% of Dempo Mining Corporation and 50% of the equity of Goa Maritime. Sesa Goa has agreed to pay $368 million, which includes $31 million of working capital.

The deal will be done in cash. Sesa Goa said it can fund the acquisition from the cash it currently holds, estimated at $872 million on March 31, 2009.

VS Dempo has the rights to mines in Goa with estimated reserves of 70 million tonnes of iron ore and also owns processing plants, barges, jetties, transhippers and loading capacities at Mormugao port in Goa. In the financial year ended March 31, 2009, it sold 4.36 million tonnes of iron ore and posted revenues of $213 million on which it earned an Ebitda of $91 million.

Sesa Goa is India's largest private-sector exporter of iron ore. It operates coke and pig iron plants and has mining operations in the Indian states of Goa, Karnataka and Orissa. Vedanta acquired control of Sesa Goa quite recently, in April 2007, from Japan's Mitsui for $981 million. At the time, Mitsui, for whom iron ore is a core business, said the divestment was part of a portfolio review to create shareholder value.

VS Dempo was advised by Ambit corporate finance with J Sagar & Associates providing legal advice. Luthra and Luthra provided legal advice to Sesa Goa on the deal.

Vedanta has earned a reputation in capital markets for using windows of liquidity to raise capital. In June 2008 the company raised $1.25 billion through a bond issue, the largest-ever bond offer by an Indian corporate and the biggest high-yield offer by an Asian corporate. Of the total proceeds, a $500 million tranche was to be repaid in 5.5 years and the balance $750 million in 10 years. J.P. Morgan and Morgan Stanley acted as global coordinators and bookrunners on the bond issue. They were joined at the bookrunner level by Barclays, Citi and Deutsche Bank.

In early 2006, Vedanta raised $725 million from the sale of 20-year convertible bonds, in a deal led by Barclays Capital.

Sesa Goa's share price gained 5.65% on the National Stock Exchange on Friday to Rs203 ($4.28). Vedanta lost 8.47% on the London Stock Exchange the same day to close at £15.99 ($26.33), as shareholders digested the news of the CB.