The much-awaited consolidation of the domestic business operations of Essar Steel is finally complete, with the court approvals coming in and the debt from four different legal entities getting consolidated into a single company last week.
The earlier debt that was scattered in Essar Steel Hazira Ltd, Essar Steel Orissa Ltd, Hazira Plate Ltd and Hazira Pipe Mill Ltd will now all get consolidated into the books of Essar Steel Ltd (ESL). These four companies were set up outside ESL because the latter was weighed down by debt and the group did not want to put further pressure on its finances.
Essar Steel’s Chief Financial Officer, Mahadev Iyer, confirmed to Business Standard that the amalgamation exercise was indeed over. “Last week, the major part of the debt consolidation exercise got completed … and with the Ahmedabad and Mumbai High Court approval coming in, the scheme of amalgamation is done.”
The merger will be effective with retrospective effect from April 2009. ESL’s three overseas firms— Essar Steel Algoma Inc., Essar Steel Minnesota USA and PT Essar Indonesia— will stay out of the merger plan.
Essar Steel last week also bought UK steel processor Servosteel, with a 500,000-tonne per year capacity, for an undisclosed sum.
Though Iyer did not want to talk specific numbers, Essar Group sources say, post consolidation, Essar Steel Ltd will have a consolidated debt on the books of Rs 17,300 crore and equity of around Rs 14,000 crore for its India operations.
The entire debt from close to 40 lenders got consolidated last Thursday at a joint lenders meeting at Essar Group’s Mumbai headquarters, when nine major banks decided to buy out the other lenders. “The nine banks include SBI, with the highest exposure of Rs 7,000 crore, followed by IDBI with Rs 2,200 crore, ICICI Rs 2,000 crore, and Union Bank, Canara and PNB each taking a Rs 1,750-crore exposure,” said a banker involved in the process, on condition of anonymity.
Other banks included HDFC, Bank of Baroda and Bank of India, the banker added. SBI Caps was the lead advisor to the entire merger and debt consolidation process.
“The joint documentation got started on July 1. It was a kick-off meeting. Now the lender group will disburse the new loans and the older ones that are scattered amongst so many lenders will all get repaid. The necessary sanctions have all come in and the actual drawdown will also happen soon,” the banker added.
Part of bigger plan
The consolidation of the borrowing is part of a bigger merger story that will help Essar Steel to lower future borrowing costs, improve profit margins and avoid duplication of brands.
“The advantages are several, which we have already stated in the amalgamation documents. A simplified debt administration is just one of them,” said Iyer.
Following the merger of four firms into ESL, the company’s turnover will also rise over two and a half times, to close to Rs 35,000 crore. And, a bigger balance sheet will help ESL to raise more money for organic and inorganic expansion, beside avoiding transfer pricing. “And, a higher net worth will automatically give them comfort to bid for bigger projects,” said the banker.
ESL has a current capacity of 8.6 million tonnes which they plan to raise to 14 mt by 2011-12. The ultimatum aim is to take the group’s combined steel making capacity to 25 mt. ESL had also purchased Shree Precoated Steels Ltd, a 1.2-mt downstream steel rolling and galvanising plant, for Rs 900 crore.
The consolidation of the Indian borrowings is seen as a part of a larger strategy of the $15-billion (Rs 70,200 crore) Essar Group, with interests from steel, power to shipping and telecom. Recently, Essar Group raised $2.5 billion for Essar Energy Holdings, the holding company of the group’s oil and gas and power businesses.
Many Essar watchers see the consolidation in steel also as a precursor to future fund raisings, even abroad. Essar Global, owned by group chairman Shashi Ruia and his younger brother, vice-chairman Ravi Ruia, owns 93 per cent of ESL after they bought back shares from other shareholders in 2007. Public shareholders who did not subscribe to the two buy-back offers own seven per cent in the company.
“A relisting cannot be ruled out. It may not be immediate, but these are the first definitive signals towards that. It can be in the LSE (London Stock Exchange) or we may even see a relisting on the Indian bourses,” said a domestic fund manager who had invested in Essar Steel prior to its 2007 delisting. “There is a reason why Ravi Ruia has resigned from the boards of Essar Shipping and Essar Oil to relocate to London,” he adds.
Essar Steel Ltd is housed under Essar Steel Holdings, the holding company for its entire steel operations across the globe.
Iyer said no plans had been readied for a listing. However, he admitted that post the restructuring, fund raising will get a lot easier, both in India and abroad.