India: NCLT approves ArcelorMittal’s takeover bid for debt-laden Essar Steel

ArcelorMittal Chief Executive Lakshmi Mittal. Photo: Reuters

More than a decade after his first abortive bid, steel baron Lakshmi Niwas Mittal moved closer to his plans to enter the Indian steel industry on Friday. Indian-born Mittal’s steel company, ArcelorMittal SA, is the world’s largest by volume but, ironically, doesn’t have a steel plant to its name in India.

After over a year of legal wrangles with bidders, courts and banks, the Ahmedabad bench of National Company Law Tribunal (NCLT) on Friday approved ArcelorMittal’s resolution plan for debt-laden Essar Steel Ltd.

ArcelorMittal, in a joint venture with Japan’s Nippon Steel & Sumitomo Metal Corp., has offered an upfront cash settlement of ₹42,000 crore to lenders and a ₹8,000 crore capital infusion. ArcelorMittal is also planning a ₹18,697 crore capital expenditure programme for the asset till 2024, according to its 2018 annual report.

In its order, the NCLT, however, asked ArcelorMittal to offer 15% of the upfront cash settlement of ₹42,000 crore, or ₹6,300 crore, to operational creditors. The original resolution plan only offered ₹196 crore to operational creditors against claims of ₹4,976 crore. The NCLT order means financial creditors—the banks—will have to take a deeper haircut on the asset.

The approval comes after the National Company Law Appellate Tribunal (NCLAT) on 28 February directed NCLT Ahmedabad to take a decision on ArcelorMittal’s offer for Essar Steel plan by 8 March.

On 29 January, NCLT Ahmedabad had rejected a full debt settlement proposal of ₹54,389 crore from the shareholders of Essar Steel. The tribunal ruled that the offer violates Section 12A of the Insolvency and Bankruptcy Code (IBC), which says the promoters can retrieve a company from bankruptcy proceedings by paying full settlement but not after other parties have submitted their expressions of interest.

“We welcome today’s pronouncement by the NCLT Ahmedabad. While we will need to review the full written order once it becomes available, we hope to complete the transaction as soon as possible,” said a spokesperson for ArcelorMittal.

An Essar spokesperson said: “We continue to believe that our settlement offer of ₹54,389 crore is the most compelling one available to Essar Steel creditors and fulfils IBC’s declared overriding objective of value maximization, which has been established time and again by courts at all levels. We are also confident of the legal validity of our said offer made under Section 12A, which provides for the withdrawal from the IBC process by making full payment to the creditors. We are awaiting a copy of the NCLT order and will take a call on next steps after examining the same.”

The Essar Steel acquisition will give ArcelorMittal control of India’s largest single-location flat steel mill in Hazira, Gujarat, with a nameplate capacity of 10 million tonnes per annum. However, the plant is operating at much lower capacities and will need significant investment to run at full capacity. The asset also has two iron ore pelletisation plants, at Visakhapatnam and Paradip, and a downstream steel hub in Pune, close to a automobile manufacturing hub.

While ArcelorMittal has proven expertise in turning around sick steel units and driving down costs till the plants turn viable, Essar Steel’s turnaround will be its most ambitious yet.

“The Essar Steel plant has always been the highest-cost flat producer in the country,” Atanu Mukherjee, president at M.N. Dastur and Co., a global metals and energy consultant, said in an interview two weeks ago. “Its products are generally priced at $445-450 a tonne, while competitors JSW Steel Ltd and Tata Steel Ltd, with much lower costs of production, price themselves a tad lower and cash in on high margins,” he said.

If ArcelorMittal enters India and sets the sick Essar Steel unit right, it will “flatten the cost curve”, thus eating into the margins of competitors. That’s one reason steel producers would prefer a struggling steel plant on India’s western coast rather than one that is up and running, Mukherjee said. “The competition that ArcelorMittal is going to force on local competitors will be intense,” he said.

ArcelorMittal is the world’s leading steel and mining company, with a presence in 60 countries and an industrial footprint in 18 countries.

Mittal made several attempts to get his foot in the door in India, notably with projects planned in Odisha and Jharkhand in 2005 and 2006, but none took shape. In 2010, the company signed an agreement with the Karnataka government to set up a 6 million tonne per annum capacity, but the land acquisition process for this project has only just been completed.

The bulk of Essar Steel’s steelmaking capacity is built to run on natural gas. Operations at the plant ran into trouble in March 2011 when the then government changed its gas allocation policy and cut off the supply to the company after categorizing the steel sector to “non-core” from “priority”. The company has said in the past that it had to bear a loss of approximately ₹26,000 crore between 2011 and March 2016 due to non-supply of gas.

In May 2017, Essar Steel’s lenders—with the State Bank of India as the consortium leader—had come close to finalizing a restructuring proposal for the company. However, in June, the Reserve Bank of India (RBI) identified the asset as among its “dirty dozen” for immediate resolution at the bankrutpcy courts.

This article was first published on livemint.com

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Singapore Reporter/s

In Singapore, we are looking to double our reporting team by this year-end to comprehensively cover the fast-moving world of funded startups and VC, PE & M&A deals. We want reporters who can tell our readers what is really happening in these sectors and why it matters to markets, companies and consumers. The ability to write precisely and urgently is crucial for these roles. Ideal candidates must have to ability to work in a collaborative, dynamic, and fast-changing environment. We want our new hires to be digitally savvy and ready to experiment with new forms of storytelling. Most importantly, we are looking for hard-hitting reporters who work well in a team. Collaboration and collegiality are a must.

Following vacancies can be applied for (only in Singapore).

Following vacancies can be applied for (only in Singapore).   

  • A reporter to track companies/startups that have raised private capital, and have the potential to become unicorns. SEA currently has over 40 companies with a valuation of over $100 million and under $1 billion.
  • A reporter who can get behind the scenes and reveal how funding rounds are put together, or why they’ve failed to materialise. She/he in this role will largely focus on long-format stories. 
  • A journalist to track special situations funds, distressed debt and private credit (from the PE angle) across Asia.