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Bidding to Win

Nevin John     February 6, 2018

It was assumed all along that Essar group director Prashant Ruia's frequent trips to Moscow would conclude with the sale of Essar's oil refinery business to Russian oil giant Rosneft. But there is more to it than meets the eye. The Moscow visits seem unlikely to end soon since the Ruias are now working towards forming a consortium with Russian bank VTB and Hong Kong-based SSG Capital Management to regain control of the debt-laden Essar Steel, put up for sale under the bankruptcy law. Essar Steel has over `43,000 crore of debt on its books.

As things stand, VTB and SSG are expected to contribute the lions share of the funds required for the bid while the Ruias would most likely be minority shareholders in the consortium, say media reports. The move by the Ruias has captured the attention of the corporate world since it comes after the government amended the Insolvency and Bankruptcy Code (IBC) to prevent promoters of loan defaulting companies from regaining control without settling the overdue amount. It is clear that the Essar promoters will have to pay overdues, estimated to be between `6,000 crore and `7,000 crore - this includes interest and charges relating to non-performing asset accounts before the submission of the resolution plan. The deadline to submit bids for Essar Steel has been extended to February 12 from end-January after potential bidders sought more time to finalise their deal structure and funding arrangements.

A Crowded Race

According to sources in the committee of creditors (CoC), which include banks that lent to Essar Steel, the Ruias want to win back their steel asset. "But they don't want to pay `7,000 crore only for qualifying. They are ready to make the payment if they get back the asset," says a banker. There is no guarantee the Ruias can win back the company as they will have to battle it out with the world's largest steelmaker, ArcelorMittal, which has joined hands with Japanese giant Nippon for the bid. Others in the race are Anil Agarwal's Vedanta and Tata Steel.

"The Ruias, however, do not see Vedanta and Tata Steel as strong contenders. Their interest is in taking over the asset at a cheap valuation and without the debt of over `25,000 crore," says a Mumbai-based investment banker. In addition, he says, they themselves are weighed down under a debt-burden. Tata Steel has a gross debt of `90,000 crore, taken mostly for the Corus acquisition. Vedanta had a gross debt of `55,218 crore as on December 31, 2017, though at the net level, it's only `16,295 crore because of the cash reserves of the recently merged Cairn India and the subsidiary Hindustan Zinc.

The Opportunity

The big challenge before the Ruias is the ArcelorMittal-Nippon combine.


Both companies are looking for a footprint in the `3.15 lakh crore Indian steel market. It becomes all the more attractive as steel prices have shot up 15 per cent in the past seven to eight months. At the present demand growth rate of 8-10 per cent a year, there will be a need for additional capacity in India by 2021.

But there are no big plans for capacity creation given the high debt levels of steel companies and the prevailing high interests in the country. ArcelorMittal and Nippon see this as an opportunity, say sources.

The big question is whether the combine will quote a sizable debt takeover. According to the restructuring plan submitted to its lenders by the Ruias last year (before Essar Steel was taken to the National Company Law Tribunal, or NCLT, by the lenders), banks were offered 30-35 per cent stake in the company and seats on the board, while the Ruias planned to retain management control with a 40 per cent stake. For diluting their stake in favour of banks, the Ruias sought about `10,000 crore to be converted into long-dated securities redeemable at a later date, extension of the loan repayment period to 20 years and an average interest rate cut of 2 per cent.

The plan of the promoters still looks attractive for banks while the other prospective bidders are looking for a 50 per cent hair-cut.

Essar Steel's 10 million tonnes (MT) steel production facility in Hazira, Gujarat, is operating at around 80 per cent capacity after the rise in demand, says a company official. "The resolution team claims a turnaround of the plant after they took over. But the fact is that the earlier management was paying around `250 crore every month for servicing the debt when the plant was running at 60 per cent capacity. After the resolution professional came in, the company stopped repayments as part of the insolvency proceedings. That improved the cash flow and the company turned profitable," he adds. The liquidation value of Essar steel is estimated at `22,000 crore.

The Ruia Gameplan

If the Ruias do get a chance to bid, they will put forth an irresistible offer to the CoC, say the bankers. If they are not allowed, the Ruias will have to front outsiders to bid for the company or challenge the IBC in the higher courts. Videocon Industries has reportedly filed a writ petition in the Bombay High Court seeking a stay on NCLT proceedings initiated against it by banks. After the prodding by the Reserve Bank of India (RBI) under the IBC. Videocon Industries is the second company after Jayaswal Neco to challenge the RBI's decision. Even if the Ruias successfully rope in outsiders, there is no guarantee that the family can take over Essar Steel in future as steel industry valuations are already on rising. If the Ruias do manage to regain control over Essar Steel, the entire process under IBC will be questioned. The Singhal family, promoters of Bhushan Steel, is keenly watching the Ruias since they are also hoping to follow suit. The potential bidders for Bhushan Steel, which has a liquidation value fixed at `15,000 crore, includes JSW Steel, Vedanta and Tata Steel. With promoters of debt-laden steel companies looking to regain control, it's definitely going to be interesting times ahead.

A number of steel companies are takeover targets under the new insolvency guidelines. JSW Steel has submitted a `3,700 crore worth resolution plan for Monnet Ispat. The liquidation value for the company was `2,385 crore. Vedanta submitted the highest bid of `4,500 crore for Electrosteel Steels. However, Tata Steel, which submitted a `3,500 crore bid has asked for a rebid citing lack of clarity on taxes during the time of bid submission.



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