KKR, Tata Steel likely to bid for Essar Steel

By: |
May 24, 2016 7:38 AM

Essar Steel owes Rs 30,000 crore to banks, which is estimated to result in more than 51% stake in the company

Essar Steel’s debt takeover has evinced interest from eight prospective bidders, which include private equity major KKR, Hong Kong-based special situations fund, SSG Capital, Tata Steel and JSW Steel.

According to sources close to the development, in addition to the aforesaid names, four more prospective bidders have collected Information memorandum (IM) for the sale process which is being jointly managed by SBI Caps and ICICI securities.

“The initial deadline for submitting the non-binding bids was to end on May 15 but has now been extended to June end,” a senior banker who is directly involved in the process told FE.

Essar Steel currently owes R30,000 crore to the banks, which according to sources will result in more than 51% stake in the company on equity conversion through the strategic debt restructuring route. When contacted, an Essar spokesperson, however, denied any knowledge of a deadline for ongoing sale process. “Essar Steel and the consortium of lenders have jointly appointed SBI caps and ICICI Securities to bring in a new investor and the process is still on and there is no deadline set for that yet”.

It is, however learnt that lenders have proposed that a new investor infuse at least R5,000 crore in fresh equity to begin with. “The rest will depend on further negotiations and we will evaluate all options once the bids come in,” said a senior banker directly involved in the sale process. “Currently there are several possibilities, for example the objective of a pure financial investor could be very different from a strategic investor and all these factors have to be considered before any decision is taken,” he said adding, “We have received interest from both financial and strategic investors but only when the binding offers come in, a clear picture will emerge.”

Industry experts maintain that for a deal to materialise the lenders may have to agree to a significant haircut. “The banks may have to settle for atleast 30% haircut on the outstanding loans if they really want a deal to go through as no investor will be willing to risk so much capital given the operational issues involved and the poor economic environment in the domestic steel sector,” said a fund manager of a large distressed assets fund, which is considering to bid for Essar Steel.

Industry sources, meanwhile told FE that Essar Steel has submitted a turnaround plan for the company which includes a moratorium on payment of principal and interest, which is in line with Indian Steel Association ( ISA) existing demand for financial assistance for the steel industry.

In an email response to FE, Essar Steel, however maintained the Ebitda margins of the company has significantly improved in the past two quarters. “The all round efforts of the company in various facets of its operation like production, sales & marketing and cost improvements have resulted in an excellent operational turnaround and resurgence of Essar Steel. The production has doubled since November and is currently operating at 70% capacity utilization. This has resulted in significant improvement in Ebitda margin which has improved to 18%-20% from 5% in November last year,” the company said.

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