The Centre’s proposed disinvestment of the Salem Steel Plant might not be an easy task given the growing opposition from the political parties in Tamil Nadu. Besides, the mounting losses at the unit would mean that the sale might not fetch an attractive valuation.
The Narendra Modi government is considering privatisation of the Salem Steel Plant in Tamil Nadu and the Visvesvaraya Iron and Steel Plant in Karnataka, both loss-making units of the public-sector company, Steel Authority of India Limited (SAIL). The move is aimed at making them profitable.
The plan to divest stakes in the Salem Steel Plant has attracted strong opposition from political parties such as the DMK, the PMK and the TMC, along with the Centre of Indian Trade Unions (CITU).
The landmark plant in Salem was established in 1970 and employs over 2,000 people. The plant has been making continuous losses. Its losses have increased to Rs. 349 crore in 2015-16 from nearly Rs. 100 crore in 2011-12.
“If the plant has been making losses and could be turned around, the Government should look at increasing its efficiency by increasing the management bandwidth rather than looking at privatisation as welfare of the workers is involved,” says Professor Kamal Ghosh Ray, an expert on mergers and acquisitions. The Government, he said, should look at the product lines of the plant and study ways to improve efficiency and profitability.
An abortive attempt
This is not the first time the Government is trying to privatise the Salem Steel Plant. A similar attempt 13 years ago failed both for political and strategic reasons.
Mr. Ray in his book Mergers and Acquisitions: Strategy, Valuation and Integration explains why the deal failed from a strategic point of view.
In 2003, 51 per cent of controlling stake of SAIL in Salem Steel Plant was up for sale and there were initially two bidders for the stake — the Tata Steel-Unisor combine and Jindal Strips.
Later, Tata Steel-Unisor pulled out saying it did not see any strategic sense in the deal, making Jindal Strips the sole bidder.
However, the deal did not go through because of valuation issues, according to the book.
In 2001-02, Salem Steel Plant generated revenues of Rs. 338.7 crore and posted loss of Rs. 72.2 crore.
SAIL-appointed consultant JM Morgan Stanley valued the former’s 51 per cent stake at Rs. 402.2 crore, while SAIL was expecting to sell it for Rs. 500 crore banking on the goodwill of Salem Stainless Steel brand, as per the book.
“Yes, it is true that Salem Stainless Steel products were the favoured choice of the Indian households due to their superb quality. SAIL wanted to encash on the brand’s goodwill; however, in the absence of profits, that value could not be realised at that time. The same problem would persist now also with the mounting losses,” said Mr. Ray.
When contacted, a senior SAIL official declined to comment on the development saying only the 'government' could respond on the issue.
