JSW Steel, part of the diversified infrastructure player JSW Group headed by Sajjan Jindal, has decided to bid on its own for Stemcor assets in India valued by experts at between $1 billion and $1.5 billion.
This essentially means that Jindal Steel and Power, the flagship steel company of younger brother Navin Jindal, too, will have to bid on its own for the assets of the UK-based steel trader. Sources say a consensus has built up within the JSW top management that the company has the wherewithal to buy the assets single-handedly.
In fact, after trying to woo the State Bank of India to fund the proposed acquisition if JSW wins the bid, the company has also started talks with India-based foreign banks who had been in the country for over a decade. Both JSW Steel and JSPL could not be reached for details.
However, analysts are wary as they say balance sheets of all companies making a beeline for the the assets are highly stressed. Apart from JSW Steel and JSPL, companies such as Essar Steel, the mining arm of the Aditya Birla Group, Tata Steel and international trading company Glencore are said to be in the race.
?The data available on Stemcor are scant but anything beyond a billion dollars will be difficult for JSW or others to manage,? an analyst said.
Consider this ? usually during acquisitions, experts look at the already exiting debt and interest outgo of the acquirer companies as that indicates their ability to service further debt.
According to the figures at the end of September 2013, JSW Steel is saddled with a net debt of R27,000 crore and interest outgo of R24,983 crore. For JSPL, the net debt is R28,527 crore against an interest expense of R11,613 crore (it also has a smaller scale of operations) and the numbers stand at R52,442.7 crore for net debt and R40,860 crore as interest expense for Tata Steel.
?While none of the companies are suitable enough to go for the acquisition based on the strength of their balance sheet, promoters have various ways of raising capital. Also, the assets of Stemcor will matter for them from a longer term perspective,? said an analyst with an international brokerage.
He added that it is JSW which will have the best synergy if it bags the Stemcor assets.
Stemcor has two main assets in India with substantial investments in Odisha – Brahmani River Pellets (BRPL), a 4 million tonne per annum (mtpa) beneficiation plant in Barbil and a pellet plant complex in Jajpur, both in Orissa, connected by a 220 kilometre underground slurry pipeline.
It also has a majority stake in Aryan Mining and Trading Corporation ? a 57.2% Fe grade 100 million tonne iron ore reserves with a license to mine 3 mtpa., in addition to 2 mtpa of manganese ore. Additionally, it has a 10% equity stake in Mideast Integrated Steel which has an iron ore mine at Roida, Orissa, with current output of 4.4 mtpa.
For JSW Steel, these mines are strategically located as the company has proposed to come up with a 10 mtpa value added steel plant in West Bengal, with its joint venture Japanese partner JFE.
However, so far no iron ore mine has been allocated to the company and hence it is going slow with the project.
Recently, Stemcor had extended the deadline for submitting a binding bid for its assets from November 18 to January 6 as the company itself was embroiled in a legal battle with ICICI Bank ? one of the prime lenders to the company in India, which had objected to the sell-out of assets as they were given as collateral to the bank for a loan.
According to unverified media reports, both Stemcor and ICICI bank were reaching an amicable conclusion to the tiff.
When contacted, Charles Armitstead, spokesperson for Stemcor, said: ?Regarding ICICI Bank, the only thing that we have said from the outset is that we fully intend to meet all our obligations to them. We are not making any further comment than that.? He said Stemcor has never publicly announced a deadline on the sale process and all negotiations remain confidential. Discussions relating to the sale of Indian assets are continuing to make good progress.
Sources say one of the possibilities being contemplated is that the company which buys the assets will eventually have to pay back the bank.