On Monday JSW Steel agreed to take control of debt-ridden Ispat Industries, making it India’s largest private-sector steelmaker. The deal is remarkable.
In just eight days the two steelmakers have come to an agreement that will see JSW take a 41% share in Ispat for Rs21.57 billion ($474 million). JSW will restructure Ispat’s debt, restart its idled facilities and reengineer its marketing strategy so the two companies no longer sell in the same markets.
The deal doesn’t just make sense from Ispat’s point of view. JSW will seriously expand its business through acquisition in a country where greenfield projects have proved extremely difficult to pull off.
Both parties should be congratulated for pulling the deal off. India’s steel sector is dominated by family-controlled companies, which can make cooperation difficult.
“I must compliment the Mittal family for this strategic alliance that the two companies have entered into,” said JSW vice chairman and md Sajjan Jindal. “The deal size might not be the largest but it is a historic deal.”
“[The] partnership will create value,” said Ispat md Vinod Mittal. “It shows how two individual entrepreneurs can work together.”
To facilitate the deal, Ispat will issue 1.086 billion shares at Rs19.85 per share for a consideration of Rs21.57 trillion. In addition JSW will make an open offer to minority shareholders in Ispat.
Once the transaction is completed, JSW plans to refinance the entire outstanding debt of Ispat and put a plan in place to turn the company around.
This largely comes down to marketing. JSW will no longer compete with Ispat in its key market — western India. Ispat will withdraw from the Southern Indian market, where JSW is stronger.
“Ispat’s cost of transport now averages at Rs1,400 per tonne,” Jindal said. “This will come down to Rs300 per tonne.”
At the same time, JSW’s transport costs will drop to Rs1,400 per tonne from their present average of Rs1,550.
When you consider the price of hot rolled coil in India is in the region of Rs31,000-32,000 per tonne, this arrangement definitely makes sense. There are other synergies as well.
“What is Ispat’s major problem today? Expensive power,” Jindal continued. “We have a merchant power plant nearby, which will start supplying Ispat’s plant in the next ten days.”
Raw material procurement will get easier as well. Right now. Ispat imports iron ore pellet from overseas. Soon, the company’s requirements will be sourced from JSW’s plant in Southern India, where capacity is set to grow by 4 million tpy in the next three months.
JSW will also supply coke to Ispat’s plant at Dolvi from another facility in the south of the country.
As time progresses, Ispat will set up captive coke ovens, a pellet plant and a power plant to fully-integrate its steelmaking facilities and reduce their cost of production. Debottlenecking will help boost Ispat’s capacity from 3.3 million tpy to 4.2 million tpy.
But, for the time being, JSW’s deal with Ispat will focus on the company’s debt.
“We will take out all of Ispat’s existing lenders in the next nine months by refinancing these debts with lower cost borrowings,” Jindal explained, saying that JSW’s holding in Ispat will fall to 39.9% when some of the company’s lenders convert part of their debt to equity.
“They now want to reap the upside,” he said.
For the same reason, the Mittal family’s stake will fall to 24.5%.
Ispat, which will be renamed JSW Ispat Steel after the deal is completed, was forced to idle its Dolvi plant in Western India in early November due to a lack of working capital.
Since the deal with JSW was announced, work has already started to restart the plant, which will produce its first hot rolled coils in January.
The combination will make JSW one of the world’s largest steelmakers, able to produce 11.5 million tpy of crude steel.
