Mumbai: India’s third largest steel maker, JSW Steel Ltd, will sell a 14.99% stake to Japan’s second largest steel company, JFE Holdings Inc., for a minimum Rs4,800 crore, in a deal that will give the Indian firm cash it needs to cut debt and gain access to expensive technology.
The deal gives the Japanese company entry into the fast growing Indian market and allows it to take advantage of the accelerating demand from domestic automobile companies such as Maruti Suzuki India Ltd, Toyota Motor Corp., Honda Motor Co. Ltd and Hyundai Motor Co. The deal announced by the Japanese steel firm on Tuesday is linked to the market price of JSW shares.
According to the deal terms, if the average closing price of the stock touches or exceeds Rs1,365 in two consecutive weeks or 10 consecutive days or ends at that or a higher level for five consecutive trading days, between 27 July and 31 August, JSW will issue 32 million shares at Rs1,500 per share. If that does not happen, JSW will give JFE one fully convertible debenture valued at more than Rs4,800 crore.
“The debenture can be converted at Rs1,500 a share within 18 months also if the average closing price of the stock touches or exceeds Rs1,365 a share in two consecutive weeks or 10 consecutive days or ends at that or a higher level for five consecutive trading days,” JSW said.
In case the JSW share price does not cross Rs1,365 in that period, the debentures will automatically become equity shares at a conversion price of Rs1,331 a share. JSW shares ended at Rs1,160 on Tuesday.
“The difference in the prices is because of the perception in valuation of both the buyer and the seller,” said an investment banker who advised on the deal.
Vice-chairman and managing director Sajjan Jindal said the deal details were worked out through “mutual consent”. “They (JFE) wanted a benchmark and this (stock price) is the most transparent benchmark for independent valuation of the company,” he said. “This money will be used to deleverage our balance sheet and also for our working capital needs. It will give us access to much-needed technology to short circuit the learning curve in making more and more automobile and specialized steel as demands in our country expand. It will also improve productivity and maintenance practices.”
JSW has Rs17,700 crore of debt on its books, 44% of it in Indian rupees. The firm will pay off the high-interest rate, short-term loans maturing in two to three years, said Seshagiri Rao M.V.S., joint managing director and group CFO. “Right now, our debt to equity is 1.71:1, we expect to reduce it to 0.5:1 in the next 18 months.”
Bhavesh Umesh Chauhan, analyst with SMC Global Securities Ltd, said the deal looks fair, given that JFE “would have taken years to build a greenfield plant in the country”. “Also, in case JFE cannot buy the shares in the next 18 months, JSW will have to pay an interest of 4.5% on Rs4,800 crore for that period. But what I am really interested in is whether JFE will take a stake in JSW’s 10-million-tonne West Bengal project,” he said.
Jindal said the deal was struck keeping in mind the 30% growth in the automobile sector in the last year. “Japanese companies are the best in the world, so it will help us with the technology in manufacturing the outer panel for the automobile market and also to improve plant performance,” he said, adding that the deal also includes exchange of talent. “It will help us to reduce costs by 3-5% and help add 10% volume in the auto space. We hope to start supplying higher grade steel to European companies in the next 15-18 months.”
JFE vice-president Shigeru Ogura told reporters in Tokyo that a weak domestic market left it no choice but to shift focus to expanding overseas markets.
“We need to tap demand in broader Asia including the Middle East. Within that, India is an appropriate place to make an investment, and we view JSW as an attractive company with good growth strategy,” he said.
JFE, which has been relying on exports and lagging Nippon Steel Corp. in setting up manufacturing bases in emerging economies, has no interest in taking a bigger stake in JSW, Ogura said. “JSW made it clear that they want money, but don’t want to be controlled by JFE.” he told reporters. He said JSW’s high stock price was also a deterrent. JSW will seek shareholder approvals in a meeting on 26 August.
Nomura Financial Advisory and Securities (India) Pvt. Ltd were advisers to JFE while Citibank advised JSW.
Interestingly, the Jindal family, owners of the company, were allotted warrants in June at a conversion price of Rs1,210 per share. The company has already received Rs529 crore out of the Rs2,120 crore it is to receive from the warrants.
The Jindal stake will increase to 49.70% after the conversion of warrants from 45% currently and will fall to 42.50% in case JFE is able to buy shares by the end of August.
Reuters contributed to this story.