Sajjan Jindal-promoted JSW Steel on Tuesday announced the acquisition of Jindal United Steel Corporation, Saw Pipes USA and Jindal Enterprises LLC, at Baytown, Texas, for $940 million (Rs 3,854 crore) in a leveraged buyout deal from Jindal Saw, the flagship company of elder brother P R Jindal.
The cost of acquisition consists of $810 million (Rs 3,321 crore) for purchasing 90 per cent stake in these companies and $130 million (Rs 533 crore) for taking over of inventory.
This acquisition will enable JSW make foray into the growing oil and gas sector in North America.
These companies will be merged into one entity, JSW Steel USA, through a merger scheme. It will have production capacity of 1.2 million tonnes of plate mill, 0.55 million tonnes of pipe mill and 0.35 tonnes of double jointing and coating lines.
The balance sheet of JSW Steel USA will be consolidated with JSW by the last quarter of this year.
JSW will chip in $150 million (Rs 615 crore) towards its equity contribution. It will raise debt of $230 million (Rs 943 crore), which will be transferred to the target company's balance sheet after 18 months. It will also raise debt of $560 million (Rs 2296 crore) leveraging the balance sheet of the target company.
JSW will form a wholly-owned subsidiary in the Netherlands and step down subsidiaries in the US to raise finance for the acquisition. The structure of the subsidiaries will help JSW to enjoy tax benefit.
JSW Steel vice-chairman and managing director Sajjan Jindal said the company would ship slabs from its Vijayanagar plant to the US to convert them into high-end products such as plates and pipes. These products would cater to the growing energy market in the US. "The acquisition will be EPS accretive," he added.
According to Jindal, it would take four years for JSW to recover the investment for the acquisition. The three companies have a combined loss of $17 million, but enjoy a 14 per cent EBITDA margin.
The acquisition price works out to 6.25 times of the proforma earnings before interest depreciation taxes and amortisation (EBIDTA) for 2006-07 and is comparable with the transaction EBIDTA multiple of 4.7 to 14.8 times for similar transactions in the steel industry internationally.
Jindal said JSW Steel USA would record $850 million (Rs 3485 crore) of sales this year and $1.5 billion (Rs 6150 crore) next year.
Seshagiri Rao, director-finance, JSW Steel, said, the sale price of high-end products today stood at $1,600 a tonne against the conversion price of $400 a tonne.
Rao said replacement cost of setting up a similar facility in the US would cost JSW about Rs 6,000 crore (Rs 60 billion), according to consultant Hatch Associates.
He said that the company was confident of improving the operations substantially through various initiatives such as quick capacity ramp-up, supply of better quality and right-size slabs matching with the requirement of the target companies, committing capex commitments for upgrades and improving the facilities to reduce the downtime and achieve cost reduction with improved capacity utilisation.
In another development for the JSW Group, the board has approved the setting up of a beneficiation plant at a cost of Rs 850 crore (Rs 8.5 billion).
Phase 1 of the project will be completed within a year, coinciding with the commissioning of capacity expansion of 6.8 million tonnes. Phase 2 will be commissioned by September 2010, alongwith commissioning of capacity expansion project to 10 million tonnes.
The plant is expected to give significant cost savings, productivity improvement from the use of low-grade iron-ore and reduction of alumina and silica.
JSW also announced today that the company has entered into an agreement with Orbit Corporation to buy office premises at Lower Parel, jointly with group companies, in which JSW Steel's share (including all cost) is Rs 336 crore (Rs 3.36 billion).
The project cost is proposed to be financed by a term loan of Rs 500 crore (Rs 5 billion) and the balance out of cash accruals. The payback period is about 12 months.
