Vedanta's KCM bid in trouble

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Administrator Posted: Wed, Feb 27 2008 11:13

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Vedanta's KCM bid in trouble
By Kingsley Kaswende and Joan Chirwa

Tuesday February 05, 2008

VEDANTA Resources Plc’s bid to acquire the 28.4 per cent shares owned by the Zambia Copper Investments (ZCI) has landed into trouble following its rejection by ZCI shareholders who feel cheated by the ‘undervalued’ offer price of US $213.85 million.

The move has faced further trouble from the Zambia Competition Commission (ZCC) which says Vedanta needs authorisation before increasing its stake in KCM through its Call-Option Deed with ZCI.

KCM is owned 51 per cent by Indian Vedanta; 28.4 per cent by ZCI, a legal entity from Bermuda; and 20.6 per cent ZCCM-IH (88 per cent of which is owned by the Zambian government).

Vedanta currently holds a Call-Option Deed on the 28.4 per cent of KCM still owned by ZCI whereby they agreed that the latter, upon exit, would offer its 28.4 per cent shares in KCM to the former.

On January 17, 2008, independent investment bank, N M Rothschild & Sons Limited, pursuant to their appointment by Vedanta and ZCI to establish the price at which Vedanta shall have the option to acquire ZCI's 28.42 per cent interest in KCM submitted their report.

Rothschild, who assessed the value as it stood in August 2005, came up with the figure of US$213.85 million for the 28.4 per cent, thus evaluating 100 per cent of KCM at US$750 million.

Vedanta has the right to accept or refuse to go on with the call, but ZCI cannot refuse to sell. As a result, Vedanta now has a reasonable period within which to accept or reject the valuation price as determined by the bank.

However, from the figure that Rothschild came up with, Vedanta seems to have struck another bargain and may not hesitate to go ahead with the purchase.

Vedanta Resources Plc has since engaged Lusaka Lawyer Eric Silwamba to assist the company to go ahead with plans to acquire additional shares in KCM.

Silwamba could, however not give any details to the matter, saying he could not discuss the client’s issues in the press without authorisation.

According to a submission by Jean-Luc Chaillan, Chairman of ZCDEFENSE, a group of minority shareholders in ZCI and ZCCM, the trouble is that ZCI shareholders feel the shares have been undervalued and Vedanta will buy the shares very cheaply as it did to the 51 per cent shares in KCM, as latest independent evaluations for KCM shares are far more than that of Rothschild.

Vedanta bought 51 per cent of KCM stock in November 2004 for a mere US $48 million. Back then, this sale came under fire from a cross section of Zambian industrialists, unions, political parties and the media, and was described as an outrageous pillaging of Zambian resources.

All the evaluations conducted by various financial audit agencies are way above the Rothschild figure.

For instance, Morgan Stanley & Company International, in a survey about Vedanta dated December 15, 2005, evaluated the 51 per cent of KCM at US$1.321 billion, which makes KCM worth US$2.590 billion, far above the US$750 million proposed by Rothschild.

Other subsequent assessments are even higher. When the Rothschild evaluation came out, financial analysts, Lehman Brothers, immediately concluded that it was a bargain on the part of KCM because KCM was worth at least twice the suggested amount.

ZCI shareholders also argue on dividends that did not accrue to them.

Chaillan argues that in the ZCI financial report of December 31, 2004 there is a line "Investment in associated companies (are worth) US $61.282 million" and KCM is the only one investment in associated companies of ZCI.

And the report of September 30, 2007 the line "Investment in associated companies" disappeared, but the line "Assets classified as held for sale US $205.398 million" appears, and the difference between the two figures in the lines comes up to US $144.116 million and represents the "Dividends not received".

According to him, Vedanta will pay only US $213.15 million for the shares, and taking into account the dividends not received of US $144.116 million, the real price will only become US $69.034 million for Vedanta (US $213.15 million minus US $144.116 million), equivalent to the amount of profit for one year of exploitation of the mine.

He describes the whole episode as "Theft and plunder of Zambian resources by greedy investors."

Further, ZCI has a current account with KCM of US $47.5 million, the form of deferred shares, according to the Vedanta 2007 Annual Report.

Page 95 of the report (97/140) states: "Non-equity minority interests are represented by the deferred shares in KCM held by ZCI of US $47.5 million and ZCCM of US $11.9 million."

It seems that this sum will also be acquired at Vedanta if the transaction takes place, so the final real price will only become US $21.534 million for Vedanta (US $69.034 million minus US $47.5 million).

ZCI shareholders also argue that the price at which Vedanta may purchase the 28.4 per cent of KCM today is set at August 2005, yet between August 2005 and January 2008 the price of Vedanta’s shares on the London Stock Exchange has multiplied by four times.

A look at the different studies that have been done on KCM shows that the shares are worth more than the Rothschild assessment.

In September 2005, late Jean-Pierre Rozan, former chairman of ZCI, proposed the amount of US $1.2 billion for the 28.4 per cent of ZCI, or more than US $4 billion for KCM, which Vedanta Refuses.

On December 15, 2005, Morgan Stanley assessed 51 per cent of KCM at US $1.321 billion, and US $2.590 billion for the entire KCM while on January 19, 2006, Morgan Stanley assessed 51 per cent of KCM at US $1.057 billion, and US $2.073 billion for the entire KCM.

Then on February 8, 2006, JP Morgan evaluated 51 per cent of KCM at US $636 million, or US $1.247 billion for KCM.

On March 30, 2006, Morgan Stanley assessed 51 per cent of KCM at US $1.535 billion, and US $3.010 billion for KCM.

On May 19, 2006, Morgan Stanley assessed 51 per cent of KCM at US $2.107 billion, and US $4.131 billion for KCM

On June 1, 2006, Morgan Stanley assessed 51 per cent of KCM at US $1.387 billion, and US $2.720 billion for KCM.

On October 5, 2006, Morgan Stanley assessed 51 per cent of KCM at US $1.937 billion, and US $3.798 billion for KCM

And on March 6 2007, JP Morgan evaluates 51 per cent of KCM at US $1,418 billion, and US $2.780 for KCM.

Therefore, for Rothschild to evaluated the entire KCM at US $750 million is a clear gross understatement, ZCI investors feel.

They reminded Zambians of the way KCM was handed to Vedanta on a silver platter, and said Zambians should work together to ensure that it did not happen again.

At first sight, it might seem irrelevant to evoke Zambians since ZCI is based in Bermuda. In addition, Zambians routinely refer to ZCI as exclusively foreign interests.

But it is not so. Actually, a majority Zambians own ZCI.

In 2003, the Anglo-American Company owned half of ZCI when it decided to part with ZCCM. At that point, it transferred its stock to a Zambian foundation and to the Trust of Employees of KCM.

The annual report of ZCI for the end of 2002 states: "As a consequence of this restructuring, your company is now owned 47.7 per cent by public shareholders, 44.3 per cent by the CDF (Copperbelt Development Foundation) and 8 per cent by the ESOT (KCM Employee Share Ownership Trust)."

Public shareholders hold shares on the stock exchange in Paris and Johannesburg, most of them possessed by small shareholders.

Between 2005 and 2006, ESOT distributed its stock to KCM employees so that today, the latter must control eight per cent of ZCI.

As a result, ZCI is owned majority (44.3 per cent + 8 per cent =52.3 per cent) by Zambian citizens. And it is not the wealthy Zambians who took advantage of KCM's rise and therefore that of ZCI, but on the contrary low-income workers, thanks to the action of the Copperbelt Development Foundation.

And if ZCI is dissolved following this, the Foundation will receive only about US $100 million for carrying out charitable and development work on the Copperbelt Province and Mumbwa district, although it should be at least three to five times higher and if Vedanta had distributed the money earned since 2004, the Foundation has already reached over US $60 million without selling KCM shares.

And Zambia Competition Commission (ZCC) acting executive director Thula Kaira said the execution of the call-option deed between Vedanta and ZCI was subject to authorisation.

ZCC has since written to the two parties advising them of the legal requirements of seeking authorisation from the commission before they could effect the transaction.

“Once the parties have sought authorisation, the commission shall then carry out its assessment in accordance with the best international practices,” Kaira said.

“The Zambia Competition Commission would like to clarify that the execution of the call-option deed is subject to its authorization. In this regard, the parties would require the commission’s authorisation before the transaction can have legal effect in Zambia.

“Konkola Copper Mines Plc is neither a state-owned enterprise nor does it act on behalf of, and or can it bind the republic of Zambia.”

Vedanta Resources Plc holds 51 per cent shareholding in the enterprise and has a management contract thereof. Arguably, the situation would have been different if the call-option under contention was between Vedanta Resources Plc and ZCCM-IH. We have since noted that the recent dispute over the valuation of ZCI shares has not involved the republic of Zambia.

“Notwithstanding the foregoing, while the government of Zambia has been expressly identified and is a party to the subscription agreement; Main Shareholders Agreement; Development Agreement as well as to the amended and restated Development Agreement, the government is not so identified in both the latter and spirit of the Vedanta call-option deed. In this context, section 3(f) of CAP 417 does not apply.”

And section 8 subsection (1) of Cap 417 of the Laws of Zambia states that: “Any persons who in the absence of authority from the commission whether as a principal or agent and whether by himself or his agent, participates in a merger between two or more independent enterprises engaged in manufacturing or distributing substantially similar goods or providing substantially similar services ; a takeover or one or more such enterprises by another enterprise, or by a person who controls another such enterprise shall be guilty of an offence and shall be liable, upon conviction, to a fine not exceeding K10 million or imprisonment not exceeding five years or to both.”

Subsection (2) of the same section further states that: “No merger or takeover made in contravention of subsection (1) shall have any legal effect and no rights or obligations imposed on the participating parties by any agreement in respect of the merger or takeover shall be legally enforceable