JFE looking at increasing stake in JSW Steel

JFE looking at increasing stake in JSW Steel

Mumbai: Japan’s JFE Holdings Inc.is eyeing a larger chunk of JSW Steel Ltd, India’s third biggest steel maker, hoping to take advantage of a steep fall in the share price and recently eased takeover norms.

JFE had a 14.78% stake in JSW on 30 September, according to Bombay Stock Exchange (BSE) data.

JFE acquired a 14.99% stake in JSW in July 2010 in return for certain technology and technical assistance for automotive steel production. JSW issued 32 million shares at Rs1,500 apiece.

On Friday, JSW’s shares closed at Rs672.60 on the BSE, a 49% discount to their 52-week high of Rs1,330.90.

JFE’s Fukushima said under Japanese law, if a company acquires more than 20% of the voting rights in another company, the latter becomes an “equity method affiliate" of the buyer. If the second firm is an “important equity method affiliate" of the first, its performance must be included in the latter’s financial statements. The level of importance is decided by the acquiring company, he said.

This implies that if JFE considers JSW an important affiliate, it will vie for a 20-24% stake in the Indian firm, just short of the 25% open offer trigger that requires the buyer to offer to purchase more shares from the public. The previous trigger was 15%. India’s new takeover code took effect on 22 October.

JSW did not respond until Saturday to email and telephone queries made the previous day. Seshagiri Rao, group chief finance officer, did not answer to calls and messages since Tuesday.

In September, Sajjan Jindal, JSW group chairman and managing director, told The Telegraph newspaper that JFE’s stake will stay at 15%.

Under an agreement between them, JFE requires JSW’s approval if it chooses to increase its stake by buying shares from the open market or from JSW, said Rakesh Arora, managing director and head of research, Macquarie Capital Securities (India) Pvt. Ltd.

“While this is an important move for JFE as they can consolidate the financial statements if they cross a certain threshold; for JSW, a purchase through the open market could potentially boost the stock price," Arora said, ruling out an equity sale by JSW.

The Indian steel maker has been struggling on various fronts in recent months. JSW features in a report on illegal mining by Karnataka’s anti-corruption watchdog. It had to cut production at its Vijayanagar plant to 30% of capacity in September after the Supreme Court limited iron ore sales in Karnataka to online auctions; production revived to 50-60% a month later. And its stock hit a two-year low on 3 October, the shares falling to Rs540 after television reports of a raid at the Vijayanagar factory and a rating downgrade, Reuters had reported.

JSW is also weighed by a debt of Rs13,957.7 crore as on 30 September. In the second quarter, its operating profit margin fell to 10.74% from 19.96% in the preceding three months, and net profit plunged 71% to Rs127.12 crore.

Indian conglomerates account for a large portion of the steel major production in the country, said Anjani Agrawal, national leader, mining and metals sector, Ernst and Young Pvt. Ltd. “We have not seen a lot of foreign interest taking shape as expected so far."

Among such foreign steel makers in India are Europe’s ArcelorMittal and South Korea’s Posco, whose proposed mega projects in the country have hit regulatory hurdles.

But given the abundant iron ore resources in the country, foreign companies are still interested, Agrawal said. “We keep getting enquiries asking us for an update on the current situation," he said, adding he sees more foreign interest for joint ventures than for standalone investments.

Reuters contributed to this story.

Deals India, published jointly by Mint, Dow Jones Newswires and The Wall Street Journal, is a one-stop destination for investment professionals following deal flow, deals news, private equity and venture capital activity in India.


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