The country’s third largest steelmaker, JSW Steel, on Tuesday acquired a controlling 40% stake in ailing Ispat Industries for Rs 2,157 crore. This would put JSW ahead of all but state-run SAIL in the country’s steel game and rescue debt-strapped Ispat promoted by the brothers of global steel tycoon Lakshmi Mittal.
The 40% stake controlled by the Jindal family-run JSW will be after a planned dilution of equity taking place as part of the effort to rescue Ispat, sitting on a debt mountain of Rs 7,500 crore.
The deal price was 20% below Monday’s closing, which in anticipation of the buyout had run up 4%. JSW’s Rs 3,000-crore cash chest will aid the deal.
In the red for the last five years except in 2008, Ispat’s steel plant has been shut since November 7, but roared back to life on Tuesday. JSW announced the plant would be fully operational by the start of next year and the company would turn profitable in 12 months.
Following the announcement, shares of Ispat fell 15 percent on the Bombay Stock Exchange to close at Rs 21.2, while that of JSW Steel rose 2.2% at Rs 1,211.9.
The deal takes the combined steel production capacity of the merged entity to 14.3 million tonnes by March 2011, making it the largest domestic steelmaker by installed capacity. It will, however, produce less steel than SAIL as Ispat’s plant has been shut since November (see table).
JSW Steel will also announce the date of open offer to minority shareholders to buy a minimum of 20% as required by law in a day or two.
"It depends upon how much we get in open offer but the maximum that we can go is up to 51%,” said Sajjan Jindal, vice-chairman, JSW Steel.
The existing promoters, Pramod Mittal and Vinod Mittal, will continue to hold 24.5% stake (post dilution) in the new entity, JSW Ispat Steel, which will receive R3,100 crore in new investments over four years.
The company will set up a captive coke over plant, pellet plant and power plant to achieve complete integration of facilities.
“Over the next nine months we will refinance the whole debt by taking out existing lenders and bringing in new lenders and bring down the cost of debt to favourable level” Jindal said.
The strategy is clearly to save on operational expenditure in fuel and power. Jindal said Ispat pays a high cost for power at R6 per unit and JSW will supply power from its Ratnagiri plant and save on costs. Ispat will also save on coke supply and pellets supply from JSW as against the current situation where it imports them.