Mumbai: Essar Global Ltd, which holds an 88% stake in India’s fourth-biggest steel maker Essar Steel Ltd, has agreed to buy Canada’s Algoma Steel Inc. for $1.58 billion (Rs6,636 crore), to set up a base for its North American operations and raise its production capacity by more than 50% to 7.1 million tonnes (mt) a year. Algoma shareholders will receive C$56 (Rs2,072) a share, the two companies said in a statement.
“This acquisition fits in with our global steel vision of having world-class, low-cost assets with a global footprint. Algoma provides us with an excellent platform for the Canadian and North American markets,” Shashi Ruia, chairman, Essar Global Ltd, said in a statement.
Algoma supplies steel to US car makers such as General Motors Corp. and Ford Motor Co. It shipped about 2.42mt last year, with about 80% coming from hot-rolled sheet.
Essar is a strategic buyer, said Algoma spokesperson Brenda Stenta, adding that the company intends to invest in facilities in Sault Ste. Marie, Ontario, where Algoma is based. Essar Global offered C$56 per share for Algoma. The price is 48% higher than the 20-day average of the Canadian firm’s stock price ending 14 February, when Algoma confirmed takeover talks. The offer is seven times Algoma’s operating profit.
This is a second large cross-border transaction by an Indian steel maker in recent months. In January, Tata Steel Ltd had bought Corus Group Plc. for $12 billion. The acquisition of Corus had increased Tata’s total capacity to 23.5mt.
“Indian steel producers are acquiring businesses overseas because it gives them access to facilities that are in proximity to the ‘premium’ markets as well as customers in these markets,” said Hitesh Agrawal, a research analyst at Mumbai-based Angel Broking Ltd.
Algoma’s operation is fully integrated with a raw steel production capacity of approximately 2.8mt per year. The company also has a 15-year supply agreement for coal and a seven-year pact for iron ore. “In the long term, Essar may benefit from its exposure to the global markets as this will enable the company to get a better realization for its products,” said Kanan Shah, senior analyst, Networth Stock Broking Ltd.
Global steel prices have stayed firm for the past few months and Indian players with a presence in the global markets can earn better margins on their products.
In India, however, steel prices have been suppressed, partly because the government doesn’t want companies to do anything to increase inflation. The government has no say on steel prices, but has indicated that it wouldn’t like makers of critical inputs such as cement and steel to increase prices.
Currently, the domestic price of hot-rolled coils, which is an intermediate steel product that could be used to make other products, is about $600 a tonne. The price in the US market is $700 a tonne.
Shares of Essar Steel gained 1.73% to close at Rs41.2 on BSE that witnessed a broadbased rally on Monday, with the benchmark index, Sensex, climbing 311.50 points or 2.33% to 13,695.58. Algoma’s share rose 26 cents to C$54.12 on 13 April on the Toronto Stock Exchange.