JSW Steel to buy out promoters in doddering Ispat

Sajjan Jindal-led JSW Steel Ltd is set to take over the reins of beleaguered Ispat Industries Ltd from the Mittal brothers — Pramod and Vinod — who have struggled to keep the steelmaker afloat for over five years.

Controlling Ispat Industries is critical for JSW, which has steel-making units in Maharashtra, Karnataka and Tamil Nadu. Through these units, it enjoys an edge over peers such as Tata Steel in catering to the western regions, as freight is one of the crucial overheads in the business.

By acquiring Ispat’s Dolvi plant, JSW retains the edge over its peers in the western region, as most of the steel makers except Essar Steel are predominantly operating from the eastern region.

For over five years, Ispat’s bankers have been grappling to revive a company, which had reported a net profit only once in fiscal 2008, in a span of five years, and that too because commodity prices were at their peaks.

Among the lenders with an exposure to Ispat are IDBI Bank, ICICI Bank, IFCI and State Bank of India.

The lenders were reported to be negotiating with JSW till late in the night on Monday.

Meanwhile, speculation on the deal contours has been rife.

“JSW Steel and entities controlled by Sajjan Jindal are buying 45.5% stake in Ispat Industries through a fresh issue of shares. This will trigger an open offer. After the deal, Mittal (mainly Vinod Mittal) and family will continue to hold close to 26% in Ispat,” Moneylife, a personal finance magazine’s web edition, said quoting sources close to the transaction.

The Mittal brothers, unlike their more successful sibling — Lakshmi Mittal of Arcelor Mittal, the world’s largest steel maker — have always been low profile and grappling with servicing the debt pile.

Initially, the Mittals went on a diversification spree by entering basic telephony services in Mumbai through a joint venture called Hughes Ispat. The telephony business went in a distress sale to the Tata group.

As on September 30, promoters Pramod Mittal and family, along with many of its investment vehicles, held 41.14% of the total equity of Rs1,222 crore. Of this, around 39.1% was already pledged as the company had repeatedly missed deadlines to pay back its huge debt of up to Rs7,000 crore.

Last week, a consortium of lenders comprising IDBI Bank, SBI, ICICI Bank and IFCI increased its stake in the company by 10% through conversion of loans as the company failed to meet its interest payment schedule.

While no official confirmation has been received from any of the companies, it is expected that JSW Steel would purchase 30% stake in Ispat Industries at a price of Rs26-30 per share, which is the remaining pledged portion of the promoters’ stake.

“The current effective holding of the promoters stands at 30%, which JSW Steel might buy out,” an industry source said. Though the price is still being negotiated, he said it would be in the range of Rs26-30 per share.

However, this could not be confirmed from the bankers, or from JSW and Ispat Industries. JSW spokespersons chose not to comment, while Vinod Mittal did not return calls.

Ispat Industries will hold its annual general meeting on Tuesday in Kolkata, and sources say the announcement will be made before the shareholders.
Sources in JSW also said that the company might announce something in this regard by Tuesday evening or Wednesday morning.

But at Rs25-30 per share, JSW may be paying more than it should for Ispat, say some analysts.

“Historically, Ispat has never gone beyond Rs25. Moreover, the EV/Ebitda of Ispat is around 7.2, while its peers are in the range of 7.5, which means the stock is too expensive,” said Ruchita Maheshwari, a metals analyst with brokerage house Nirmal Bang Securities.

Besides, though the company has an installed capacity of 4.12 million tonne per annum and is the fourth biggest steel manufacturer in the country, it has no access to captive coal and iron ore mines.

Therefore, there is no upside in the stock so far and whatever gain we are seeing is simply speculative.

However, some analysts are also of the opinion that a deal with a company like JSW Steel, which is one of the lowest cost producers in the world, could change things for Ispat.

Ispat Industries had a net loss of `331.62 crore on September 30, 2010.