The committee of creditors of the debt-laden Essar Steel India Ltd. has chosen ArcelorMittal SA and Nippon Steel & Sumitomo Metal Corp (NSSMC), Japan’s largest steel producer and the third largest steel producer in the world, as the winning bidders for the asset, Nippon Steel said in a statement on Friday.
The two companies would pay a total of $5.7 billion to buy Essar Steel, a Nippon Steel spokesman said. ArcelorMittal would own a majority stake, and Nippon Steel a nearly equal stake. “The acquisition will be implemented subject to the approvals of Indian National Company Law Tribunal (NCLT) and other relevant authorities,” the statement said.
Letter of Intent
The Lakshmi Niwas Mittal-led ArcelorMittal received the Letter of Intent (LOI) from Essar Steel's Resolution Professional (RP) on behalf on the Committee of Creditors (CoC), stating that the Company has been identified as the ‘Successful Applicant’ with upfront payment of ₹42000 crore.
Interestingly, it comes a day after the Ruia family, the promoters of Essar Group offered to pay ₹54,389 crore to the lenders for full settlement of the entire admitted claims of the financial creditors, operational creditors, and workmen and employees of Essar Steel.
"Further to ArcelorMittal being named the H1 Resolution Applicant (the preferred bidder) on 19 October 2018, ESIL’s CoC has now approved the Company’s Resolution Plan for ESIL, with the LOI identifying it as the ‘Successful Resolution Plan'," said a statement from ArcelorMittal.
The Resolution Plan includes an upfront payment of ₹42,000 crore ($5.7 billion) towards ESIL’s resolution debt, with a further ₹8,000 crore ( $1.1 billion) of capital injection into ESIL to support operational improvement, increase production levels and deliver enhanced levels of profitability.
Essar Steel is an integrated flat steel producer, and the largest steel company in western India. Its current level of annualised crude steel production is 6.5 million tonnes and iron ore pellet facilities in the east of India, with current annual capacity of 14 million tonnes per annum.
"ArcelorMittal’s bid of ₹42,000 crore for Essar Steel represents a 15% haircut for lenders. Given that resolutions under IBC have led to lenders taking haircuts typically at 50-55% and even as high as 70%, a 15% haircut is a welcome relief. PSU lenders such as SBI, Canara Bank and IDBI Bank will benefit from the resolution," Noel Vaz, analyst, at IIFL Securities Ltd told The Hindu .
The resolution plan
ArcelorMittal intends to increase Essar Steel's finished steel shipments to 8.5 million tonnes over the medium-term to be achieved by initially completing ongoing capital expenditure projects, infusing expertise and best practice to deliver efficiency gains, and then through the commissioning of additional assets, while simultaneously improving product quality and grades to realise better margins, said the statement.
A long-term aspiration to increase finished steel shipments to between 12 and 15 million tonnes through the addition of new iron and steelmaking assets, in order that Essar Steel can play an active role and fully benefit from the anticipated growth in the Indian steel industry, the statement added.
In-line with Essar Steel's corporate insolvency process, the company’s resolution plan now will have to be formally accepted by India’s NCLT before completion, which is expected before the end of 2018.
After completion, ArcelorMittal will jointly own and operate Essar Steel in partnership with NSSMC, in-line with the joint venture formation agreement signed with NSSMC on 2 March 2018.
ArcelorMittal and NSSMC expect to finance the joint venture through a combination of partnership equity (one-third) and debt (two-thirds), and ArcelorMittal anticipates that its investment in the joint venture will be equity accounted, said the company statement.
(With inputs from Reuters)