Bidding war for Essar

The bidding war between ArcelorMittal and Numetal for Essar Steel will come to a head this week. Will India’s new bankruptcy laws play a vital role on who wins control..

The bidding war between ArcelorMittal and Numetal for Essar Steel will come to a head this week.

Will India’s new bankruptcy laws play a vital role on who wins control over the nation’s top steel company?

Background

Founded in 1998, Essar Steel is one of the leaders in India and abroad in the steel sector. It is part of the Essar Group. The group itself is a conglomerate that controls a number of world-class assets diversified across the core sectors of Energy, Metals & Mining, Infrastructure and services. As of March 21, 2017, the group has over 50,000 employees and has a revenue of $22 billion. Essar Steel’s revenue of $ 2.3 billion.

Essar Steel has an annual capacity of 14 million tonnes. The product includes pipes, plates cold rolling, galvanizing and pre-coated segments. It is India's largest exporter of flat steel with 10 million tons per annum (MTPA) of capacity in India and 4 million tons per annum (MTPA) in worldwide facility. Essar Steel is fully integrated from mining to retail and has specialised plants for value-added steel products like pipes and plates. On 11 June 2012, Essar Steel India commissioned a 19 MW heat recovery power plant at Hazira. In 2016, Essar Steel became the first Indian company to manufacture bullet-proof steel.

The etymology of the company is derived by combining the first letter of the Chairman's and Vice-Chairman's names – Shashi and Ravi Ruia, who are both brothers.

Analysis

In August 2017, the company was forced to declare bankruptcy. There are now competing bids from companies ArcelorMittal and Numetal for Essar Steel that are being evaluated this week. This is Mittal’s first foray into steel industry in India after the company’s scion left the country nearly 4 decades ago to build his steel empire.

The two companies are fighting for control for one of India’s largest organizations. Last week, ArcelorMittal’s Lakshmi Mittal visited Finance Minister Arun Jaitley and later commented: “I think we can create value in Essar Steel with our experience.”

“India has a long way to grow in increasing its steel consumption. The economy is growing quite favourably,” said Aditya Mittal, Lakshmi Mittal’s son and the company’s chief financial officer.

NuMetal Ltd earlier had Rewant Ruia (son of the Chairman) as its consortium partner but has signalled that it would drop him if that causes problems with India’s new bankruptcy laws. “Though we believe that Rewant is a good addition to our bid; but if that stands between us and winning Essar Steel, other shareholders will buy his stake, and this is already stipulated in our bid that was submitted” said Makram Abboud, vice-chairman of VTB Capital, the largest shareholder in NuMetal.

“The Ruias are one of our clients and we have a very good relationship with them but we are not married to them and they are not married to us, we all work independently as much as we work together” Abboud said. “Also, Rewant Ruia does not have a board representation in NuMetal and is only a minority shareholder with no say in the management and was inducted because we wanted a local partner,” he added.

It was recently when the India passed new rules when it comes to bankruptcy law in the nation. In accordance to those rules, “promoters”, or controlling shareholders, of defaulting companies are ineligible to take part in auctions under the bankruptcy regime.

Saurabh Mukherjea, chief executive of Ambit Capital, a brokerage said, “Good bankruptcy regimes don’t stigmatise failure, because then you destroy the appetite for risk taking,” he says. “But this is a new world for India . . . we need to go through one cycle of this to finesse the bankruptcy regime in our country.”

Assessment

Our assessment is that if ArcelorMittal wins the bid, then it would be able to fast track its entry into the fast growing Indian markets. The war for control over Essar Steel will usher in a new era of companies operating under the new bankruptcy laws in India. It remains to be seen if Numetal can emerge victorious. This certainly marks the end of a definitive chapter of the steel industry in India. 

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