Mumbai: In 2006, Lakshmi Niwas Mittal wrapped up his $32 billion acquisition of French steel giant Arcelor - with geopolitical implications that involved the premiers of several countries - in less than 6 months. For Mittal, the acquisition to gain size was in keeping with his proven business strategy of acquiring struggling steel mills across the world, combining capacity and gaining market share and bargaining power with buyers. Over four decades, he has done this in Germany, Poland, Romania, Bosnia, South Africa, Germany, Mexico and Canada.
But, at nearly two years, no individual acquisition has taken as much time or traipsed through as many court rooms as Essar Steel has.
On 16 November, the Supreme Court upheld ArcelorMittal, Nippon Steel and Sumitomo Corp.’s resolution plan for Essar Steel, as approved by the stressed steel mill’s committee of creditors. The world’s largest steelmaker, ArcelorMittal, and its partner Nippon Steel have offered ₹42,000 crore in upfront cash to creditors to settle outstanding debt on the mill’s books of ₹54,550 crore.
Essar Steel has a 10 million tonne (mt) per annum steel mill in Hazira, Gujarat. The company is a fully-integrated flat steel manufacturer with ore beneficiation, pellet making, iron making, steel making, and downstream facilities, including cold rolling mill, galvanizing, pre-coated facility, steel processing facility, extra wide plate mill and a pipe mill. In its FY17 annual report, the firm had said that it was the only private steel mill in the country which was allowed to supply steel for warships, submarines, battle tanks and armoured vehicles.
Anand Bhageria, Partner, Singhi Advisors, who specialises in advising mergers and acquisitions in the domestic metals space, told Mint: “ArcelorMittal has tried to set right all the things they got wrong in India so far, like the attempts to set up a greenfield plant in Odisha; or acquiring a stake in Uttam Galva without taking management control, hoping it will give them access to the upstream activities of steel-making; or the JV they entered into to explore setting up a plant in Goa. Now in just one stroke, even though is a huge investment, they have taken over control of a large asset in India. They know India is a major market and this is the price to pay for business here."
“The Essar Steel acquisition is certainly consistent with L.N. Mittal’s strategy of taking distressed assets of good quality and re-organizing them into productive assets for the long haul," Atanu Mukherjee, president of global metals and energy consultant M.N. Dastur, told Mint. “Now that he has made the initial bet, there are a couple of areas of investment needed to make the plant productive. He might also, eventually, consider expanding capacity to 12 or 15 mt over the long-term."
Mukherjee estimates that ArcelorMittal will invest up to ₹20,000 crore additionally in the plant over the next few years. “While the mills and finishing lines are world-class, the gas-based DRI (direct reduced iron) production plant is not cost-competitive," Mukherjee said. “Gas is expensive in India so gas-based DRI steel production is not feasible. I would imagine that they would invest in a blast furnace, BOFs (basic oxygen furnace) and coke ovens to replace the gas-based DR (direct reduced iron) and EAF (electric arc furnace) units and get to a competitive cost structure. They would probably first make investments to stabilize production at 6.5 million tonnes per annum, followed by a build-out to 8.5mt and then to 10mt. I would imagine that these would take an investment of anywhere between ₹15,000-20,000 crore over the next 5-6 years."
ArcelorMittal-Nippon's resolution plan includes ₹8000 crore of equity infusion into the plant's operations. ArcelorMittal declined to respond to Mint's queries on the company's takeover and management plans for Essar Steel.
At ArcelorMittal, Aditya Mittal - who has driven the Essar Steel acquisition - has a big role to play in prioritizing capital allocation and in making investment decisions on projects. “There’s a large amount of capital involved in Essar and I would imagine it is his priority that the plant is operating profitably quickly. ArcelorMittal picks targets that make sense – be it Ukraine, France, Germany or Mexico. Acquisitions are never smooth. Their acquisitions may have different issues – either union trouble in Europe or government or policy issues in Central Asia – but they always ride these out," Mukherjee said.
What lies ahead for ArcelorMittal in India? Bhageria takes a guess: “I believe that KSS Petron (whose debts ArcelorMittal had to pay off) is a dead investment for the Mittals. It’s more interesting to see what they will do with Uttam Galva, now that they own all the debt. They could take the company to insolvency or to NCLT for reorganization under Section 230 of the Companies Act. There are downstream cold rolling mill and galvanizing and colour-coated facilities here that are valuable."
For the mill in Hazira to function smoothly again, ArcelorMittal will need to strike a deal with the Ruia family, which controls the Hazira terminal that ships out the steel made at the plant, and a slurry pipeline that carries iron ore from reserves Chattisgarh to a beneficiation plant in Paradip, Odisha. “With regard to other assets linked to Essar Steel operation and owned by Essar group companies, I think the Essar group will see sense in doing business with the Mittals," Bhageria added. “They may already be sitting together somewhere to work out a deal. I think both parties will be keen to work out the details of using the Hazira terminal and the pipeline."