Essar Steel Faces Takeover Threat

Essar Steel, a leading player in the steel industry, appears to be facing a takeover threat. Daily volumes of trading in the Essar Steel scrip on both the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE) have increased substantially in the last few weeks, even though the price of the scrip has not yet registered any rise.

Market sources confirmed that a London-based client had placed some orders for purchase of substantial chunks of Essar Steel shares through leading institutional brokerage houses in India.

These purchase orders have attracted a lot of attention in the market as they have come a few days before the Securities and Exchange Board of India is due to notify the new takeover code.

Speculation is rife in investment banking circles about the intentions of the London-based non-resident Indian L N Mittals intentions of setting up his base in India. Mittal has a long record of expanding his business through acquisitions.

Besides, Essar Steel is an attractive target for him as its replacement cost is the highest among the steel majors. The replacement cost is the ratio of net assets to the market capitalisation of the stock.

For Essar Steel, the replacement cost works out to 7.64 as per its 1995-96 balance-sheet. According to a compilation prepared by the Business Standard Research Bureau, the net assets of Essar Steel stood at Rs 5,265.71 crore while its market capitalisation stood at Rs 689.01 crore. Ispat Industries is a close second with a replacement cost of 7.41 and Lloyds Steel is a distant third at 4.76.

Sources claim that an offer is being prepared in line with the new takeover code and will be submitted only when the takeover code is notified by the capital market regulator.

When contacted in his London office, L N Mittal declined to comment on reports that he was making the purchases. When asked if his decision to offer no comments on such queries meant that he was not denying the reported purchases, Mittal said: You can draw whatever conclusions you want.

Top-level Essar sources, however, ruled out any takeover attempt. They pointed out that nearly 75 per cent of Essars equity is controlled by financial institutions, promoters and foreign institutional investors.

L N Mittal is a family friend of the Ruias. Theres no question of any such attempt by him, they stated.

A source said: The Ruias control about 37 per cent of the companys equity, while about 19 per cent is held by the financial institutions who have always stood by the promoters.

The rest is with the public which has entered the stock at levels above Rs 100. Even if there was a threat to take over the company, there should have been a movement in the stock price over a period of time as an acquirer should have at least five per cent stake in the company.

Besides, the book value of the share is at Rs 70-levels and it is not feasible to make an offer on the basis of the 6-month high and low of the companys market price which is roughly at Rs 25, the source added.

Although the companys stock price has not recorded considerable movement, trading activity has been hectic.