In a desperate move to enter India, ArcelorMittal, the world?s largest steel producer had last week announced to become a co-promoter of India-based secondary steel producer Uttam Galva Steels Ltd.
The deal, which is at a premium, is considered as an overvalued deal by experts that ArcelorMittal has paid for getting its first major manufacturing presence in the country. ArcelorMittal will make an open offer to acquire 29.5% stake at Rs 120 per share, representing a 27% premium over the two weeks volume weighted average and of 85 % over the 6 month volume weighted average. If it succeeds, its stake will increase to 35% in Uttam Galva.
Industry watchers say that Indian steel markets are likely to offer good prospects in long term but the risks in large greenfield scale projects are enormous?from land acquisition to statutory clearances to raw material securities. Hence, an operational asset may be better suited for acquisitions, which is observed in this deal.
ArcelorMittal?s plan for greenfield steel plants in India, with a total capacity of 12 million tonne, in Jharkhand and Orissa, have been put off due to delays in acquiring land and allotment of mine, as also by the global economic slowdown.
Uttam Galva, which thrives on steel mills for its raw material had in its 2008-09 annual report said there exists a threat regarding short supply of raw material (mainly due to limited producers offering raw material) and non-tariff barriers like safe guard duties being considered to be imposed by the Centre discouraging import of raw material at international prices which is low compared to domestic prices.
Uttam Galva purchases bulk of its raw material from different units of ArcelorMittal.
It would now be benefited with operating linkages with ArcelorMittal, including purchases of hot rolled coil, as well as having access to its global distribution network, which would potentially benefit its export sales. ArcelorMittal will be able to provide an assured source of supplies and even broaden Uttam?s customer base in India and abroad.
The rating agency Fitch believes that if there is a substantial change in the current business plan leading to a debt-led capex, materially impacting the credit metrics of the company, this may off set the positives brought in by the linkages with ArcelorMittal.
The details of the business plan post completion of transaction with ArcelorMittal, including its configuration, time lines and funding pattern have yet to be finalised.
However, if the open offer fails, the Miglani family will part with some of their shares so that both promoters will have equal stake.
