Mumbai: Sajjan Jindal-led JSW Steel Ltd took the Street by surprise on 10 May when it evinced interest in Tata Steel Ltd’s UK assets, only to add later that the interest was merely “exploratory” in nature.
It better be. Buying the UK assets, which led to severe losses for Tata Steel’s European operations, do not look like a good idea for a company that has a total debt of Rs.35,171.26 crore and a Debt-to-Ebitda (earnings before interest tax depreciation and amortization) ratio—a measure of company’s ability to pay off debt—of 8.55 times, as on 31 March 2016..
On 4 April, Fitch Ratings Ltd downgraded the company citing a decline in profitability and rise in leverage coupled with debt-funded investment in capacity expansion.
In the face of so much stress, why then would JSW Steel bid for Tata Steel’s UK assets? Could it be to gather market intelligence? “For most of the steel deals the company has looked at in the past, it seems to be more from an academic interest viewpoint,” said a senior steel analyst who did not wish to be identified.
In Europe itself, the company has looked at two steel plants in the recent past—Italy’s largest steel maker Ilva Steelworks and the second largest steel firm Lucchini SpA. The company was in talks to buy these two steel plants in September 2014, but both the deals did not close in favour of JSW.
“For these plants, the company put in really low bids,” said a second steel analyst who did not wish to be identified. He agreed that JSW Steel’s interest in Tata Steel UK may be driven by the intent to understand the financials of the overseas business.
Back home, JSW Steel was one of the firms that showed interest in buying the assets of Stemcor India Ltd, the Indian arm of the UK-based and Oppenheimer-family-controlled Stemcor Holdings Ltd. The deal is yet to close.
However, not everyone agrees that JSW’s bids are academic in nature.
“Not academic interest, but the group would be intending to own some assets in Europe. They may find the valuations attractive and are hence going ahead with the bidding,” said Anubhav Gupta, an analyst with investment broking firm Maybank Kim Eng Securities India.
Rahul Dholam, senior equity analyst for Angel Broking Pvt. Ltd, expects JSW Steel to bid low for Tata Steel’s UK assets, which makes it an unlikely contender. “Surely, JSW Steel will not bid aggressively for the Tata Steel’s assets. But I don’t expect the other bidders to put in aggressive bids either. You do get access to more information on the competitor’s books but they could also get lucky if they get the assets at a very low valuation,” he said.
An email query sent to the spokesperson for the JSW Group on 19 May was unanswered.
JSW Steel is not the only group entity that has been an aggressive bidder. Cement subsidiary JSW Cement has also bid for most cement assets that have been put on the block. It was a bidder when LafargeHolcim Ltd put 5.15 million tonnes of cement assets on the block last year. On 13 May, Mintreported that JSW Cement has also put in a bid for LafargeHolcim’s revised plan to sell Lafarge India’s assets.
“Companies sometimes place bids with the mere intent to be able to access data of the cement plant which is up for sale, including local market reach and market presence data,”said a cement analyst with a domestic brokerage firm, adding JSW Cement hasn’t been a serious contender in any of the deals it has shown interest in.
An investment banker agrees.
“It is true that companies may look at assets in cement and steel with an interest in knowing market data, competition data, which is not openly and readily available,” said the banker who has advised the group in some of its deals.
To be sure, not all JSW units have followed this pattern.
JSW Energy, for instance, has looked at four power deals in the last two years. It has signed definitive agreements, or memoranda of understanding (MoUs), for the assets in three of these cases.
The power firm spent Rs.9,200 crore to acquire Jaiprakash Power Ventures Ltd’s two hydropower assets in September 2015.
Earlier in May, JSW Energy signed a definitive agreement to buy 1,000 megawatts in capacity from Jindal Steel and Power Ltd.
In 2015, the company signed a pact for a potential buyout of a majority stake in Monnet Power Co. Ltd. It also has a so-called memorandum of understanding to buy Bina thermal power plant, owned by Jaiprakash Power Ventures Ltd.