Essar Steel said to draw takeover interest from Tata Steel, JSW Steel
Essar Steel India Ltd, grappling with about Rs.44,000 crore in debt amid an industry downturn, has drawn takeover interest from domestic rivals Tata Steel Ltd and JSW Steel Ltd, people with knowledge of the matter said.
SSG Capital Management, a Hong Kong- based special situations fund manager, and some private-equity firms and international companies have also expressed initial interest in Essar Steel, according to the people.
Some suitors plan to ask Essar Steel's lenders to write off 25% to 30% of its debt, two of the people said, asking not to be identified as the information is private.
Earnings at Essar Group have been hurt by a fall in commodity prices, weak demand and lower capacity usage at its units. The Indian conglomerate, controlled by billionaire brothers Shashi and Ravi Ruia, invested about $18 billion from 2008 to 2012 to expand its operations in steel, oil and power.
Suitors may offer to pay no equity value for Essar Steel, given its level of indebtedness, according to three of the people. Potential buyers are also considering asking lenders to swap some of Essar Steel's debt for equity, one of the people said.
Essar Steel said in November it hired ICICI Securities Ltd and SBI Capital Markets Ltd to bring in new strategic or financial investors. Essar Group hasn't yet sent out an information memorandum to interested parties, according to one of the people. The conglomerate hasn't made a final decision on whether to sell the steel business, and it's possible no deal will be reached, the people said.
Essar Group declined to comment in an e-mailed statement on the suitors for its steel unit, saying the process of finding investors has started but is still at an early stage. When asked about potential bidders seeking a partial write-off of Essar Steel's debt and assigning no equity value to the business, the company said the information is "totally incorrect," without elaborating.
JSW Steel joint managing director Seshagiri Rao didn't respond to an e-mail seeking comment, while a spokesman for the company said he couldn't immediately comment. Representatives for Tata Steel and SSG Capital declined to comment.
A number of Indian lenders have marked loans to Essar Steel as soured debt in the past year, people with knowledge of the matter said earlier this month. Essar Steel has an annual production capability of 10 million tonnes and is supported by a 20 million tonne per annum pellet facility.
Essar Steel recently made a debt restructuring proposal to its lenders and is "working closely" with bankers, according to Essar Group's statement Thursday. Lenders have approved Rs.15,000 crore of loans to Essar Steel under the Indian central bank's so-called 5: 25 scheme, which allows increased flexibility when structuring debt for industrial companies, it said in the statement.
India imposed a minimum import price on steel products in February to help stem a surge in cheaper shipments coming from overseas. An economic slowdown in China, the biggest producer and consumer of metals, has hurt the global steel industry as the country exports its surplus amid weak domestic demand.
The government is working with banks and policy advisers to consider the feasibility of a bailout package for indebted local metal producers, the Indian steel ministry's top bureaucrat, Aruna Sundararajan, said earlier this month. Steel makers owed banks Rs.3 trillion, according to the latest data from India's central bank.
The introduction of minimum import prices helped contain the oversupply problem, leading to "better sales realization," Essar Steel said in a 16 March statement. The company has doubled its capacity utilization since November to reach 70% and has improved its profit margin, according to the statement.
Essar Group has made about 40% equity contribution to its projects, with the rest financed by term debt, according to the 24 March statement.
All the assets are newly built, and the company sees "significant growth potential" in the value of equity invested and reduction in debt as the assets are operated efficiently, it said.
The primary source of loan repayment for Essar is cash flow from operations, and the group continues to identify other ways of reducing debt such as selling stakes in its units and divesting non-core assets, according to the statement. Russia's Rosneft OAO has completed due diligence on the purchase of a 49% stake in Essar Group's refinery business and aims to close the transaction in June, Essar Oil said earlier this month.