GREAT THE BARGAIN HUNT
Corporate Czars are battling to pick up the over 3.44 lakh crore stressed assets on the blocks.
ON 17 NOVEMBER, a 27-member team from Londonbased ArcelorMittal drove into Essar Steel’s 10 million tonne (MT) steel manufacturing complex at Hazira in Gujarat. The team, led by Aditya Mittal, 41, son of steel baron Lakshmi Mittal and CFO of the world’s largest steelmaker, had come for a first round of due diligence. Mittal asked for safety gear—yellow hard hats and steel toe leather boots— to walk through the plant.
Mittal, who looks much younger than his years, took a close look at how steel was being made and discussed processes that Essar follows. It was a first step towards identifying and verifying records and processes at Essar Steel.
For Essar Steel employees, Mittal and team were just one group of visitors to question them and check out the plant. Around the time of the ArcelorMittal visit, the Hazira complex hosted teams from Tata Steel and Japan’s Nippon Steel. The Nippon team came with due diligence experts and M&A specialists.
The race to acquire assets of the 12 big defaulters referred to the National Company Law Tribunal (NCLT) under the Insolvency and Bankruptcy Code (IBC) by their lenders, after being nudged by the Reserve Bank of India, or RBI, is gathering pace. It is raising hopes that banks which have lent money to these companies will not have to completely write off their investments and that at least a part of India’s depressing ` 8 lakh crore non-performing assets, or NPA, story will be redeemed.
Of the 12 large defaulters identified by the RBI for insolvency proceedings, at least 10 have been able to draw the attention of buyers, including international players and global investment funds.
ArcelorMittal is hoping to pick up one of the big steel companies—Essar Steel or Bhushan Steel. Also in the fray are Korean giant POSCO and Indian steelmaker JSW Steel. In the case of Essar Steel, a resolution plan from the promoter Ruia family was also in the works but got halted after the government restrained promoters whose loans have been classified as NPAs from bidding for at least one year. As we go to press, news is trickling in that Essar and Bhushan promoters are in talks to pay their dues to be able to bid but it is uncertain whether the government will allow that. The promoters of Essar Steel, the Ruia family, will have to pay at least ` 7,000 crore in interest and principle to participate in the bid. The Singhal family, the promoters of Bhushan steel, will have to settle dues of ` 6,000 crore to keep their hopes alive. But the promoters have no surety of winning back their companies in a competitive bid since settling the dues doesn’t stop insolvency proceedings.
The action is not restricted to steel. Mumbai-based 152-year-old Shapoorji Pallonji Group has shown initial interest in acquiring India’s largest private sector shipbuilding yard ABG Shipyard, power transmission tower maker Jyoti Structures and Bharati Shipyard. Mahindra & Mahindra too, is expected to pitch in with a rival proposal for ABG and Bharati. Ajay Piramal-controlled Piramal Enterprises is believed to be in the fray for acquiring three companies— auto ancillary company Amtek Auto, Electrosteel Steels and textile firm Alok Industries. Piramal recently floated a fund with Bain Capital for buying stressed assets that is expected to bid for Bhushan Steel along with JSW. It has entered into an agreement with Dalmia Bharat
Cement to bid for debt-laden Binani Cement, which has plants with 6.25MT capacity in Rajasthan.
Why is there a surge of interest in these companies? Bidders expect banks to take sizeable haircuts in return for equity from new promoters. Essentially, they hope to get good, working assets for a fraction of the cost of building new ones. Cyril Shroff, managing partner at legal firm Cyril Amarchand Mangaldas, expects an average 50 per cent haircut in most large cases. “Lower valuation for quality assets is an important factor. Also, the IBC provides a comprehensive tool for restructuring the company and prevents interference by existing promoters. Both operational and financial restructuring (including for trade debt and statutory dues) are possible in one plan under the IBC,” says Shroff.
Banks, too, are not interested in holding on to stressed assets. After all, the IBC instructs creditors to try and revive a company – within 180 days, going up to a maximum of 270 days – and if no resolution plan is approved within the period, the company would go into liquidation.
The IBC process includes expression of interest (EoI) to the resolution professional; due diligence; presentation of the resolution plan involving acquisition; approval of the plan by the committee of creditors and the NCLT; and implementation of the plan. While the IBC does not mandate it explicitly, in most large cases, a public process akin to bidding is being followed. The process till approval of the plan should take 120-150 days from the start of the insolvency proceedings and implementation will depend on the terms of the plan.
While there are many contenders for large companies, there are few takers for small and medium companies. Alok Dhir, managing partner of legal firm Dhir & Dhir Associates, says, “Of the 400 companies in the NCLT, about 350 are facing difficulty in finding a buyer. Only existing promoters are the possible buyers there.” Most, though, are barred from bidding for their assets under the new ordinance.
For the big assets, though, the hunters are on the prowl. Here are the most prominent ones.
MITTALS ON THE PROWL
London-based Marwari businessman Lakshmi Mittal, Chairman and CEO of ArcelorMittal with steel facilities across the globe, has long cherished a steel plant in India. Despite trying for 12 years, he has yet to gain success. This time around, he is looking to take over the assets of debtridden Bhushan Steel or Essar Steel to make an entry into India’s ` 3.15 lakh crore steel market.
For ArcelorMittal, it is just the time to be in India, especially when steel prices are on the rise globally—prices have risen over 10 per cent in the last six months from $510 to $570 per tonne. ArcelorMittal, with a net debt of slightly over $11 billion, registered a profit of $1.8 billion on revenues of $56.8 billion last year. “Mittal will look for large assets. Essar’s 10 MT crude steel capacity is good enough. For starters, Bhushan’s 5.6 MT plant is also not small,” says a Mumbai-based investment banker.
Before acquiring Arcelor in 2006, Mittal had signed an