JFE keen on raising stake in JSW Steel

Japan-based JFE Steel Corporation, world’s fifth largest steel maker, said it may look at increasing its stake in its Indian partner JSW Steel after the Sebi proposal to raise the open offer trigger to 25% from 15% now comes into effect.

JFE holds 14.99% stake in the Sajjan Jindal-controlled company, which is just short of the 15% mark at which the Japanese company, under the Indian rules  will have to come out with an open offer to acquire another 20% stake in  JSW Steel.

Experts say an increase in stake might bring in a lot more equity into JSW, which it could utilise for its upcoming projects in West Bengal and Jharkhand.

“This could also be used to retire part of JSW’s burgeoning debt which currently stands at Rs16,800 crore,” said Bikash Bhalotia, analyst with brokerage Pinc Research.

Bhalotia said this will be a positive for the company but is likely to take a long time as currently acquisition norms in the country do not allow an acquirer to own 15% or more stake in a firm without triggering an open offer.

“Under current Indian rules, we cannot boost our stake in JSW without launching a tender offer bid. But should the situation change in the

future, we hope to explore the option of raising our stake to above 15%,” Eiji Hayashida, president of JFE, told Japanese Nikkei business daily on Sunday.

“I have told managing director Sajjan Jindal about our intentions and we have had no negative response so far,” said Hayashida, adding that when the rules change, JFE will not be keen on increasing its stake beyond 50%.

According to a circular issued by Securities and Exchange Board of India in July, the market regulator is ready to relax the open offer trigger from 15% now to 25%.

Bhalotia said not only will JSW get more access to equity, but may see further synergies flowing in terms of operational efficiency which can help in reducing costs further for JSW.

“It is an efficient company but is currently involved in an ugly mess where it is finding hard to secure raw materials, there by leading to an increase in the cost of production. While JFE cannot help in that, but efficiencies can increase further,” he said and added that a room for an investment in JSW’s Bengal project is also there.
JFE acquired 14.99% stake in JSW last year through a complicated process of share purchase under which JSW got access to Rs5,400 crore equity. However, that was done at a share price of around Rs1,365.

Currently, because of the impact of Karnataka mining ban, JSW Steel’s market cap has eroded by almost Rs700 per share, therefore, a share sale at this moment will not bring in as much money as it brought in 2010, if a deal is struck at market prices.