Mumbai: JSW Steel Ltd will become the largest steel maker in India as its capacity rises to 14.3 million tonnes (mt) by March 2011 after completing the acquisition of debt-laden Ispat Industries Ltd for Rs 2,157 crore.
The money will be used to buy 108.66 crore fresh shares, or a 41.29% stake, in the Kolkata-based steel maker, at Rs 19.85 per share, a 7% discount to Tuesday’s closing price of Rs 21.20.
JSW’s stock rose 2.23% to close at Rs 1,212 on the Bombay Stock Exchange on Tuesday.
“We will finance it (the acquisition) through internal accruals,” said Sajjan Jindal, JSW’s vice-chairman and managing director.
This will be followed by an open offer for another 20% stake as mandated by the Indian takeover code.
JSW is keeping around Rs 1,300 crore for the open offer, but Jindal doesn’t expect to pick up more than 10% through this route.
JSW will also look for new lenders to refinance Ispat’s high-cost debt. Ispat total liability is Rs 9,500 crore, including bank loans, Jindal said. The annual interest burden for Ispat is around Rs 1,200 crore, an Ispat official said.
“Ispat’s rupee debt is high cost and has ballooned. We have time till September to refinance debt to a favourable level by leveraging our credit rating and credibility,” Jindal said.
Ispat owes Rs 3,000 crore to IDBI Bank Ltd, Rs 1,800 crore to ICICI Bank Ltd and around Rs 1,500 crore to IFCI Ltd. Besides, it also owes Rs 1,000 crore to a group of banks.
Ispat will not be merged with JSW, but will be renamed JSW Ispat Steel Ltd and Jindal will be chairman. Vinod Mittal, currently vice-chairman and managing director of Ispat, will become executive vice-chairman.
Ispat’s chairman, Pramod Mittal, is likely to step down, although it isn’t immediately known whether he will continue to be on the board, Anil Sureka, director finance at Ispat, said in Kolkata.
Most analysts regard the deal positively. Tanuj Rastogi, senior analyst, Marwadi Shares and Finance Ltd, said JSW would have to spend around $1,000 per tonne for a new plant, but this deal means it has added a fully operational facility for around $700 (Rs 31,710) per tonne.
“The refinancing can lead to a reduction of interest costs in the range of 2-3%. Of course, in the short term, JSW’s debt equity will increase. Ispat, with JSW’s help, can get financial closure in about 12-36 months, which spells a good long-term strategic play,” he said.
Sunil Jain, vice-president, equity research, at Nirmal Bang Securities Pvt. Ltd, said the deal’s valuation is good for both the companies, but the challenge for JSW is to make Ispat profitable.
To be sure, there are concerns on JSW’s increased debt burden. “In the short term, JSW’s earnings per share will be diluted because interest costs will be higher,” said an analyst at a private brokerage.
“Also, the company may have to pay a premium at the open offer because investors will seek more value from a turnaround company.”
Jindal said it took eight days to convince Mittal about the merits of the deal.
The deal will lead to a saving of at least Rs 2,500 crore per tonne for Ispat.
“Both companies compete in the same market—we supply to Maharashtra and they to the South. We have decided that Ispat will move its steel only within a 200km (radius), which will help it cut freight to Rs 325 per tonne from Rs 1,400 per tonne, a straight saving of Rs 1,100 crore per tonne,” Jindal said.
“Also, Ispat can also gain a VAT (value added tax) benefit of Rs 1,400 per tonne if it sells in Maharashtra. We can help them develop their coking coal and iron ore assets and get them operational. They are buying power at a steep Rs 5.5-6 per unit. We plan to cut this by supplying power from JSW Energy’s Ratnagiri unit,” he added.
Ispat has been facing financial trouble on loan repayments having shut its plant in Dolvi, Maharashtra, on 7 November. The plant restarted operations on Tuesday morning.
Ispat produces 3.3 mt of hot rolled coils and 1.68 mt of sponge iron.
Vinod Mittal said the company could not run profitably because of issues with “material, finance and government policies.”
“We have been scouting for partners for two-three months and I am happy I found Sajjan. JSW is a perfect fit and this deal will create value,” he said.
On Monday, the deal hit a late hurdle after IDBI Bank threatened to convert Rs 135 crore of debt into equity “immediately”.
Jindal acknowledged that IDBI’s notice delayed the deal. “We had a huge argument with lenders because they wanted to convert at Rs 14, while we are coming in at Rs 20, but they said they had suffered for the last few years and now want to ride the upside,” he said.
In a statement, ICICI managing director and chief executive officer, Chanda Kochhar, said: “The entry of a large strategic investor into the company will strengthen its balance sheet and enable productive utilization of its capacity. This transaction protects the interests of lenders and enhances value for other stakeholders.”
Prashant Pareek, associate vice-president at Kotak Mahindra Capital Co. Ltd, said Ispat needed the money to start its mines.
“They have an initial licence and need money for exploration, which JSW will bring,” he said. Kotak was the sole adviser to Ispat.
Ispat will continue to be listed, Mittal said, adding JSW will be given first right of refusal if he sells out. Ispat’s pact with UK-based steel trading house Stemcor stands cancelled.
In September, the company had agreed to sell about 10% equity stake to Stemcor for around Rs 250 crore to part-finance its growth plans, together with a securitization programme to raise around $75 million for working capital requirements.
Manish Basu from Kolkata contributed to this story.