Steel maker ArcelorMittal’s acquisition of a 5.6% stake in Uttam Galva Steels Ltd gives it a foothold in the Indian market for value-added steel products. The acquisition is structured in a manner that minimizes ArcelorMittal’s outflow yet gives it equal share along with the current promoters. It will make an open offer to acquire a further 29.4% stake at Rs120 per share. If it succeeds, its stake will increase to 35%.
But it will be a surprise if the offer succeeds. The announcement came after market hours on Friday. The share closed up 10% at Rs113—apparently the market had some inkling of the development. The share price is sure to cross the open offer price and trade at a premium, with ArcelorMittal becoming a large shareholder. Few shareholders will tender their shares unless the price is raised. If the offer fails, the Miglani family will part with some of their shares so that both promoters have an equal stake.
Irrespective of the success of the open offer, ArcelorMittal’s entry means a lot for Uttam. It is not an integrated steel maker but buys steel for processing. It has galvanizing, cold-rolling and coating facilities. It has value-added steel products used in industries such as automobile, consumer durables and electrical equipment. In addition, it also trades in finished steel sold through its service centres. In 2008-09, galvanized steel contributed 49% of its Rs4,509 crore sales, with cold-rolled coils and colour-coated products contributing 11.4% and 7%, respectively. Sales from its services centres (and others such as scrap) contributed 32.2%. Exports are nearly half its sales.
Graphics: Sandeep Bhatnagar / Mint
Uttam depends on steel mills for its raw material. In its 2008-09 annual report, it mentions the threat of short supplies, as the global downturn led to steel mills curtailing output in the second half. Moreover, steel mills would want to sell value-added products themselves, rather than let someone else get that margin. Securing quality raw material supplies is hence a key imperative. ArcelorMittal will be able to provide an assured source of supplies and even broaden Uttam’s customer base in India and abroad.
What does ArcelorMittal gain? In its 2008 annual report, it said it has put its merger and acquisition plans on hold to conserve cash. India’s attractiveness as a steel market seems to have over ridden that objective. This will be its first major manufacturing base in India. It can use Uttam’s facilities to process and distribute its products, even as work continues on its greenfield projects. ArcelorMittal expects developing markets such as India, China, Brazil, Eastern Europe and Turkey to drive demand, especially for value-added products. Sectors such as automobiles, engineering and construction—key buyers of Uttam’s products—are all expected to grow in the coming years.
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