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Deal structure to help JSW get good price

Deal structure to help JSW get good price
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First Published: Tue, Jul 27 2010. 09 43 PM IST

Updated: Tue, Jul 27 2010. 09 43 PM IST
JFE Steel Corp. will buy an under 15% stake in JSW Steel Ltd in an innovatively structured transaction. The deal ensures JSW gets a good price, but also protects JFE from overpaying, given the uncertain outlook for steel stocks. JFE is to invest Rs4,800 crore in JSW’s equity at a price of Rs1,500 per share, on condition that JSW’s share price, which closed at Rs1,160 on Tuesday, averages Rs1,365 in certain specified time periods before 31 August.
Alternatively, JFE will get one fully convertible debenture (FCD) for Rs4,800 crore, which will mature in 18 months. It will be converted into equity at Rs1,500 per share if JSW’s price crosses the Rs1,365 trigger. Or, on maturity, it will be converted at a lower price of Rs1,331. JSW will, of course, hope that its share price rises, otherwise it will have to shell out over 4.5% interest on the FCD.
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Globally, the steel industry is going through an uncertain phase. China’s surplus steel production—24% year-on-year production growth during April-June 2010, though consumption rose by only 13%—has made it a net exporter. In addition, worries about a slowdown in euro zone demand still persist. On the brighter side, demand from certain key sectors in developed economies has edged up. Still, hot rolled coil prices fell by about 13% from their April levels, hurting steel stocks.
JSW will repay debt with the proceeds, which will lower its debt to equity ratio of about 1.5 times to about 0.7 by March (including certain other equity issuances). Interest costs, which ate away about 40% of its profit before interest in the June quarter, will also fall.
In the longer run, the more significant gain is JSW’s entry into supplying high quality automotive steel to Indian car makers. These will earn higher margins, which will go up further once JSW becomes fully integrated.
JSW’s share price was marginally down, partly due to its results, and also due to the lack of an open offer trigger. JSW reported lower steel sales during the quarter. Its operating margin still improved, due to a better mix and higher year-on-year realizations, but slipped compared with the March quarter. The company management expects steel prices to be stable from here on. But that is still uncertain as it depends on a mix of global factors, which will play out over the next few quarters.
Graphic by Ahmed Raza Khan/Mint
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First Published: Tue, Jul 27 2010. 09 43 PM IST