Es­sar Steel said to draw takeover in­ter­est from Tata Steel, JSW Steel

The Pak Banker - - COMPANIES/BOSS -

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.

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