JSW Steel, Ispat merger to form Indias second largest steel co

Written by Baiju Kalesh | Debabrata Das | Mumbai | Updated: Feb 29 2012, 06:30am hrs
Sajjan Jindal, the promoter of JSW Steel, and brothers Pramod and Vinod Mittal of Ispat Industries have agreed to merge their steel companies to create Indias second largest steel company with 14.3 million tonnes, second to government-owned Steel Authority of India with 14.6 million tonnes, a person with direct knowledge of the development said.

JSW Steel had acquired a majority stake in Ispat Industries in December 2010 for R2,156 crore and renamed it JSW Ispat Steel after lenders put the company on the block as the Mittals were unable to repay debt according to repayment schedule. Ispat Industries, owned by the younger brothers of the worlds largest steel maker Lakshmi Mittal, owed lenders R6,800 crore they had borrowed to build the steel plant.

We cannot comment on this, Seshagiri Rao, joint managing director, JSW Steel, said. The Mittals have some affirmative rights on what to do with the shares they own.

The Mittals have agreed to the merger now as they settle for a smaller stake in a bigger company, the person in the know of the development said.

Vinod Mittal did not respond to calls made on his mobile phone.

Following his acquisition of a majority stake, Jindal became the chairman of JSW Ispat and Vinod Mittal, the then vice-chairman and managing director of Ispat, became the executive vice-chairman with a 21% stake in the company.

On Tuesday, JSW Steels share closed 4.69% higher at R794.05 on the BSE, with a market capitalisation of R17,716 crore. JSW Ispats shares were 5.12% up at R13.75 each at the close of trade, a market capitalisation of R3,218 crore.

A merger will dilute both the Mittals and JSW Steels stake, as well as that of Japans JFE Corporation, a minority partner with a 14.5% stake. JFE has always wanted to increase its stake in JSW to have higher returns from Indias growing economy.

On an operational level, there will be very little changes, said a consultant with a global audit and consultancy firm. He cant be named as JSW Steel is one of its clients. JSW Steel already has a lot of operational synergies with JSW Ispat. The companys downstream units in Tarapur and Vasind are being fed by steel from Ispat. Also, Ispats retail outlets are being used to expand the reach of JSW Shoppe, the companys retail chain.

JSW Steel has a steel mill in Tarapur and Vasind in Maharashtra producing galvanised steel. Since the two are not an integrated plant, they require hot-rolled steel coils which can be sourced from Ispat that makes thin steel.

At the time of acquisition, the erstwhile Ispat Industries had a debt of R9,500 crore. JSW Steel refinanced R6,000 crore of this debt in August 2011, bringing down interest cost, and exited JSW Ispat out of corporate debt restructuring.

But despite the debt refinancing, JSW Ispat continues to post losses. The company, which follows a July-June fiscal, had reported a net loss of R1,805.88 crore in June 2011.

JSW Steel hasnt been able to turn around the operations of Ispat, said an analyst with a foreign brokerage. He didnt want to be named as the merger is not official yet. If the merger does happen, it will be for financial reasons.

JFEs holding goes down in JSW Steel as a result of the extra equity shares that would need to be issued for the merger, the analyst added. If JFE wants to maintain their holding at 15% they would need to invest more. Thus, JSW gets investment from JFE while ensuring that the Japanese companys stake doesnt go above 15% and averting the risk of an open offer. JFE bringing in fresh equity will give the merged company a better leverage ratio or debt-to-equity ratio.

JSW Ispat has 2.3 billion equity shares. A merger with JSW Steel would require additional shares of JSW Steel to be issued to JSW Ispat shareholders at a ratio that will be decided by the two companies soon.