This is the third big-ticket M&A deal in the past thirty days after Adani Power announced it was buying troubled Lanco Infra's Udupi power plant for Rs 6,000 crore. This was preceded by Reliance Power signing a pact to acquire all the three hydroelectric power plants of Jaiprakash Associates Ltd.
Under the all-debt JSW Steel Ltd-Welspun Maxsteel deal, the steel maker will take over the debt of Welspun Maxsteel.
In a statement issued on the buyout, the Sajjan Jindal-promoted company said it would acquire the entire equity shares held by Welspun Enterprises Ltd in Welspun Maxsteel Ltd "for an enterprise value of Rs 1,000 crore plus net current assets".
Welspun Maxsteel has a debt of Rs 1,030 crore on its books.
The Welspun Group, owned by billionaire BK Goenka, had bought Vikram Ispat at Salav village in Raigad district of Maharashtra in May 2009 for Rs 1,030 crore from the Aditya Birla Group. Goenka renamed the company as Welspun Maxsteel to integrate it with his flagship business of high-end pipes primarily used in the oil and gas industry.
JSW Steel said the Welspun Maxsteel deal is subject to regulatory approvals and customary closing conditions as of August 31.
When contacted, Welspun Group Chairman BK Goenka said that the sale is an all-debt deal, but a win-win for both the parties.
"We are quitting our steel-making business because it has no synergy with our core business. When we bought it in 2009, there was no issue with gas availability, but in the past few years we could not run the plant well due to paucity of gas. Therefore, the decision to exit," Goenka said.
JSW Steel has an installed capacity of 14.3 million tonne per annum and is the third largest alloy maker in the country after Tata Steel and the state-run SAIL. However, its plants in Karnataka are running under stress due to non- availability of raw materials.
JSW Steel has a strategic goal to enhance its steel production to 40 MT in the next decade.
Welspun Maxsteel is situated in close proximity to JSW Steel's Dolvi unit, offering complimentary infrastructure and location to augment the current envisaged expansions at Dolvi, the company added.
"This acquisition is value-accretive to JSW Steel due to synergies in supplying surplus pellets to Welspun Maxsteel and use of DRI from Welspun Maxsteel in the company's steel- making operations at the Dolvi plant," JSW Steel Joint Managing Director and Group CFO Seshagiri Rao said.
JSW Steel shares at BSE today closed at Rs 1,276.50, up 0.14 per cent compared to its previous closing.
Shares of Welspun Enterprises ended at Rs 256.75, down 4.77 per cent from its previous close.
The pact will help the Sajjan Jindal company to source cheaper raw material, cut production costs and strengthen its presence in the Northern and Western markets.
Welspun currently buys raw material from the global markets, forcing it to sell sponge iron at cost price in the market.
Already JSW Ispat, which has a 3-MT steel plant at Dolvi in Raigad district, has been buying sponge iron, a key raw material to make high-grade steel, from the Welspun Maxsteel plant at the nearby Salav village. JSW Steel had bought Ispat Industries in 2010 and renamed it as JSW Ispat.
The acquisition will help JSW secure a continuous supply of cheaper raw material as it plans to expand its Dolvi capacity to 5 MT.
The gas-based Welspun Maxsteel plant has an installed capacity of 0.9 MT per annum, with a captive jetty and a captive railway siding on the Konkan Railway route.
JSW Steel has surplus pellets in its subsidiary Amba River Coke which will be supplied to Welspun Maxsteel. The cost of production in Welspun Maxsteel is expected to come down due to replacement of significant portion of its bought- out pellets with captive ones.
As per a Grant Thornton report, domestic M&A deals touched USD 6.6 billion in July, taking the deal size for the first seven months of 2014 to USD 23.82 billion, which is more than double the comparable period in 2013.
The month of July witnessed 56 deals worth USD 6.54 billion, a jump of 42.48 per cent over the same month last year, when there were 42 such transactions worth USD 4.59 billion.
Apart from the Reliance Power-JP deal, the other major deals included the Diageo-United Spirits' USD 1.9 billion buyback deal and Finnish firm Huhtamaki's acquisition of Mumbai-based flexible packaging firm Positive Packaging for USD 336 million.