JSW Steel will become India's largest steel company by capacity, as it agreed to buy a controlling 41.29 per cent stake in Ispat Industries for Rs 2,157 crore (Rs 21.57 billion), valuing the company at Rs 5,224 crore (Rs 52.24 billion).
Ispat promoters Pramod and Vinod Mittal will hold 26 per cent stake in the company.
Ispat will issue on a preferential basis 1.08 billion equity shares at Rs 19.85 a share, which is a 20 per cent discount to Monday's closing price of Rs 24.95 on the Bombay Stock Exchange.
In addition, JSW will make an open offer to minority shareholders of Ispat, according to the Takeover Code.
Speaking to reporters after the announcement of the deal, JSW vice-chairman & managing director Sajjan Jindal said Ispat will be made profitable within 12 months.
Based on September 2010 quarter results, Ispat's annualised net loss works out Rs 1,326.40 crore (Rs 13.26 billion), against a loss of Rs 322.3 crore (Rs 3.22 billion) for 15 months ended June 2010 and loss of Rs 688.1 crore (Rs 6.88 billion) for fiscal year ended March 2009.
By March, JSW will have a total steel capacity of 14 million tonne, compared with Steel Authority of India's 13.82 million tonne.
JSW is currently an 8-million tonne steelmaker, which will increase to 11 million at its Vijayanagar plant by March 2011. It has another 1-million tonne plant at Salem.
Jindal said that with this, the vision to be a 32-million tonne steel producer will be achieved much faster than the earlier target of 2020.
The company has plans to build a 10-million tonne steel plant at Salboni (West Bengal) and the first phase will see a steel plant capacity of 4.5 million tonne, the work for which has started.
JSW will spend Rs 3,100 crore (Rs 31 billion) on Ispat's expansion, which will take its steel capacity to 4.2 million tonne from 3.3 million currently.
Apart from that, JSW will also set up a 110-Mw power plant, a 4-million tonne pellet plant and a 1-million tonne coke oven battery for Ispat.
Jindal said JSW would refinance Ispat's entire Rs 7,500 crore (Rs 75 billion) debt at a lower interest rate and get a fresh set of lenders on board.
He said, "We will raise the entire debt from a new set of lenders at 3-4 percentage (points) lower interest rates than the current rates and will repay existing lenders by September 2011.
| ISPAT SHAREHOLDING PATTERN |
| (in %) |
Post-
equity
infusion |
Post-
conversion of
debt to equity |
| JSW |
41.29 |
39.90 |
| Ispat |
26.00 |
24.50 |
| Lenders |
4.00 |
7.00 |
IDBI,
ICICI and IFCI are Ispat's prime lenders. Ispat also owes State Bank of India Rs 2,000 crore (Rs 20 billion) as part of its working capital debt.
The entire capital infusion will go to strengthen the balance sheet by paying off creditors and lenders.
Ispat's 3.3-million tonne Dolvi plant, which was shut on November 7 due to a severe cash crunch, was restarted on Tuesday.
Giving a broader sense of how JSW will make Ispat profitable in the next one year, Jindal said, "Ispat sells some of its steel in south India and we sell some in Maharashtra.
Now, Ispat will sell all its steel in Maharashtra. The company currently pays a freight charge of Rs 1,400 a tonne of steel, which will come down drastically to Rs 325 a tonne."
According to Jindal, this cost saving alone will take care of the entire interest cost on Ispat's debt. JSW Steel will also help develop Ispat's iron ore and coking coal mines.
Ispat has iron-ore mines in Maharashtra with reserves of 150 million tonne and coking-coal mines in Madhya Pradesh with 70 million tonne in reserves.
Moreover, Ispat currently pays over Rs 6 a unit of electricity, as the company doesn't have its own power plant. JSW Steel will supply power to Ispat's plant from its Ratnagiri plant at a much cheaper rate.
Jindal said, "Ispat imports pellets, which is very costly. In April, we will have our pellet plant ready and, therefore, Ispat's 4-million tonne pellet requirement will be met by us."
Jindal will be the new chairman of the Ispat board and the company will be renamed JSW Ispat.
"The new board of the company will have two members from JSW against one of Ispat," JIndal said.
JSW will announce an open offer for an additional 20 per cent stake in Ispat on Wednesday.
Ispat vice-chairman Vinod Mittal told reporters after the announcement that the company started looking for a partner around two years ago and is happy to have found JSW.
Chanda Kochhar, managing director & CEO of ICICI Bank, one of Ispat's primary lenders, said the entry of a large strategic investor into the company would strengthen its balance sheet and enable productive utilisation of its capacity.
Enam Securities Pvt. Ltd. was the exclusive financial advisors to JSW for the transaction and Amarchand Mangaldas and Suresh Shroff were the legal advisors.
Kotak Investment Banking was the exclusive financial advisor to Ispat Industries Ltd for the transaction and Economic Laws Practice were the legal advisors.
JSW Steel will become India's largest steel company by capacity, as it agreed to buy a controlling 41.29 per cent stake in Ispat Industries for Rs 2,157 crore (Rs 21.57 billion), valuing the company at Rs 5,224 crore (Rs 52.24 billion).
