Riding the crest of a global steel price boom, Japan's Mitsui & Company has decided to encash its iron ore business in India. The company has put on block its entire 51 per cent stake in Sesa Goa Ltd, one of India's largest exporters of iron ore.
Investment banking sources told Hindustan Times that Mitsui has appointed JM Morgan Stanley as advisor to complete the transaction. Some of the country's leading steel manufacturers including Tata Steel, Jindal Steel and Essar are in discussions with the merchant banker, the sources said.
In fact, global tycoon LN Mittal’s Arcelor-Mittal has also thrown its hat in the ring, said an investment banker, who asked not to be identified. Karnataka-based MSPL, one of the country's largest iron ore exporters, is also involved in the talks, the sources said.
On conservative estimates, Sesa Goa has reserves of high-grade iron ore of more than 150 million tonnes located in Goa, Karnataka and Orissa. The company is currently exporting around 10 million tonnes of ores annually. Sesa Goa's ore is said to be strong in ferrous content, with much of it 58, 62 or even 64 percent rich in iron.
When contacted, Sesa Goa's managing director PK Mukherjee said he could not comment. “These things are handled at the promoters' level from Japan and I am not aware of it,” he added.
Sources close to the deal said Sesa Goa's enterprise value is expected to be around Rs 6,000 crore. The current market capitalisation of the company is Rs 4,920 crore. In fact, since mid-July, the stock price has witnessed a sharp rise and increased by around 50 per cent. The company posted a net profit before tax of Rs 807 crore on a turnover of Rs 1,735 crore in 2005-06.
Since Mitsui's holding is 51 per cent, the transaction value of its stake is expected to be around Rs 3,000 crore. Besides this, the stake's acquirer will have to fork out an additional Rs 1,200 crore to comply with the mandatory open offer under the Securities and Exchange Board of India's (SEBI) takeover code to buy 20 per cent more through an open offer.
Control over iron is becoming key for the survival of steel manufacturers, industry analysts say.
Since Sesa Goa has iron ore reserves on both the western and eastern coasts, it suits many of the Indian steel makers as well as manufacturers from Europe, say investment bankers.
Going by the current trend, the Mitsui stake will command a premium of around 35 per cent premium over the current market price, sources in investment banking said. Since the price of iron ore has increased substantially, steel manufacturers are aiming to have control over the raw material in order to maintain a continuous supply of ore at predictable prices.
Besides Mitsui, leading foreign institutional investors including Genesis and the California Public Employees Retirement System (CalPERS) own 17.4 per cent stake in the company. Indian mutual funds and insurance companies collectively hold 10 percent.