It's quite obvious by now that JSW Steel Ltd.'s strategy to acquire insolvent steel companies has not gone to plan.
Of the five assets on the block, JSW targeted three - Monnet Ispat Ltd. with a 1.5 million tonnes per annum capacity, the 5.6 mtpa Bhushan Steel Ltd. and the 2.5 mtpa Bhushan Power & Steel Ltd. It didn’t see value in Electrosteel Steels Ltd. and stayed away from the largest and hence most prized acquisition target Essar Steel Ltd. (10 mtpa).
While competition Tata Steel Ltd. seems to have bet on a east-east strategy, hoping to consolidate its presence in that geography and probably make best use of its iron ore mines there, JSW opted for a west-east policy. With most of its capacity located in western India, JSW Steel was keen to acquire assets closer to eastern markets. So it gave Essar Steel, located on the west coast of India, a miss.
Only to regret that later. Tata Steel emerged as the top bidder for both the Bhushan assets, outbidding JSW by approximately 30 percent for each.
We put in our most competitive bids, says Seshagiri Rao, joint managing director and group chief financial officer of JSW Steel.
Our intention, whenever we are submitting bids, not only here but even earlier in Ispat, we always give competitive bids. So if those competitive bids are not winning bids, for any reason whatsoever, because others have given aggressive bids, it doesn’t mean that we are not aggressive in the bidding.Seshagiri Rao, Joint MD & Group CFO, JSW Steel
Why JSW Steel Lost Bhushan Bids
Rao said a higher bid simply was not viable for JSW. At about Rs 28,000 crore, the bid for Bhushan Steel was already 30 to 40 percent higher than a similarly-sized greenfield venture. “Our benchmark for setting up a million tonne steel plant is about Rs 3,000-3,500 crore. (Bhushan) is a 5.6 mtpa crude steel facility and finished steel wise maybe 4.5 mtpa. From that point of view we can create that type of capacity maybe in the range of Rs 15,000-20,000 crore.”
So, Tata Steel's bid at about Rs 36,400 crore is not an amount JSW wants to beat. The same rationale applied to Bhushan Power too.
“They have an iron ore mine which we don't have in Orissa, so that has to be exploited or taken out before its expiry by 2030. So if any additional asset is available in Orissa, they may be able to use that iron ore,” Rao postulates while trying to explain the gap in bids.
Trying Its Luck With Essar Steel
With just one of three assets in the bag, JSW is now trying its luck with Essar Steel. In the rebid recently ordered by the committee of creditors at Essar Steel, JSW has partnered with bidder Numetal, but only with a minority interest.
Numetal approached JSW, said Rao, not sounding very comfortable with the minority interest it now has in the bidding company.
Ideally JSW would like to go it alone for Essar and Rao finds hope in a recent comment by the National Company Law Tribunal that the Essar CoC should consider fresh bids if existing bids for the Ruia-family owned company are deemed ineligible again, and the two bidders, ArcelorMittal and Numetal Mauritius (an earlier avatar that partnered with Rewant Ruia), are unable to remedy the ineligibility.
“..they are confirming to the view expressed by JSW Steel initially. That is they (CoC) should have gone for option 1 where they should allow the new entrants also to submit their bids,” Rao said.
Electronic Bidding Best
Twists and turns in the insolvency resolution process are not unique to Essar Steel. Binani Cement Ltd., for which too the JSW Group was a bidder but not among the highest, is also facing delays in the insolvency resolution process. The second highest bidder, Aditya Birla Group-owned cement company UltraTech Cement Ltd., upped its offer after the bid deadline and is currently in court insisting its revised bid be considered by Binani Cement’s lenders.
On Monday, the NCLT allowed a late bid by business group Liberty House UK to be considered by Bhushan Power’s lenders, even though the resolution process is almost complete.
The unruliness of these bidding processes can most likely only be cured by an auction process, said Rao.
“Otherwise anybody can come even in the last minute and submit a bid and then say this bid is superior,” Rao pointed out.
...then the way iron ore mine auctions or coal auctions are happening electronically, maybe, that’s a better way of settling finally the bidding process, even in IBC cases.Seshagiri Rao, Joint MD & Group CFO, JSW Steel
Watch the full conversation with Seshagiri Rao of JSW Steel here.
Edited excerpts from the interview.
How would you characterise growth in Indian steel environment?
Right now the growth momentum is very encouraging in India. Take the steel consuming sectors like automobile, infrastructure or pipelines and government aided projects. I think they are doing extremely well. This is expected to pick up the momentum going forward. That is why steel consumption growth is accelerating, particularly in the last few months. In the last quarter we have seen a growth of over 7 percent in steel demand. These are quite positive signs and very encouraging signs.
And you expect this is sustainable?
Why we feel that this is sustainable is that not only India, but the economic growth momentum around the world is also favourable and the steel industry is expected to do well. Industrial commodities are looking far better than what it was. It’s a momentum we are seen after a period of almost 10 years, after the global financial crisis. So we expect at least for sometime this momentum will continue.
About the NCLT process - Sajjan Jindal wanted several assets in insolvency. Unfortunately, where you stand today you have only 1 with about 1.5 million tonnes per annum in capacity. What went wrong with your bidding strategy?
I wouldn’t say anything went wrong with the bidding strategy. Out of the total five assets in stressed steel cases (insolvency), we shortlisted three. So we have submitted competitive bids in all the three cases. Out of that we have got Monnet Ispat. In the other two cases we are not on the top of the list, so we could not get the other two assets. Subsequently we found that there is an opportunity for one such asset like Essar Steel. We are working on that.
But you did not anticipate, you would lose both Bhushan assets did you? You didn’t want to bid for Essar at all. Essar is on the west coast, we rather get an east coast asset, Mr. Sajjan Jindal had explained to me. You did not put in an expression of interest either. You put all your hopes in the Bhushan basket and that came to naught.
Our intention.. whenever we are submitting bids, not only here even earlier in Ispat, we always give competitive bids. If those competitive bids are not winning bids, for any reason whatsoever, because others have given aggressive bids, it doesn’t mean that we are not aggressive in the bidding. So from our point of view we have given a very, very competitive and aggressive bid even for Bhushan Steel.
If you were given a chance to improve your bid for Bhushan Steel, would you?
Value for any company or any asset which is in the insolvency process, it depends upon the bidder. So the bidder has looked at what is the strategic importance of that particular asset, in addition to simple valuation of numbers. We have given our number.
You bid approximately Rs 28,000 crore, Tata Steel bid somewhere in the region of Rs 36,000 crore. This for a 5.6 million tonnes per annum capacity, easily scalable to eight and with debt today which is more than Rs 50,000 crore. Why did you bid almost 30-40 percent less than Tata Steel?
Whatever bid we have submitted is quite competitive. Because the way we benchmark - if we have to grow organically, which we have been doing up to 80 million tones today via organic and inorganic measures, our benchmark for setting up a million tonne steel plant is about Rs 3,000-3,500 crore. It is a 5.6 million tonne crude steel facility and finished steel wise the capacity maybe 4.5 million tonne. From that point of view we can create that type of capacity maybe in the range of Rs 15,000-20,000 crore.
Tata Steel bid about Rs 36,400 crore. How difficult is Bhushan Steel going to be to turn around?
The synergies which I consider may be different to what the other bidder has taken into account.
They have the iron ore mine, which we don’t have, in Orissa. So that has to be exploited or taken out before its expiry by 2030. So, if any additional asset is available in Orissa, they may be able to use that iron ore. They must have given more value to that particular asset, which anyhow we would not be able to do because we don’t have the iron ore mines.
So you would not have offered Rs 36,400 crore if you had a chance to match the Tata Steel bid?
Based on our calculations I think our bid is very competitive. But if they have any other synergies that they could bring in.. maybe that could justify the difference between our bids.
Bhushan Power has a smaller capacity, 2.5 mtpa. You lost that one as well to Tata Steel. Are you tempted to put in another bid, since Liberty House’s late bid has been allowed to be included?
Even in Bhushan Power and Steel, our calculation more or less remains the same as that of Bhushan Steel. That is why we have given, again, a very competitive bid. The way I look at it is, the other party (Tata Steel) is more aggressive than us in terms of these two assets, because they are in the east. They are also in the east, so they may have a view to consolidate and also to have more synergies from their iron ore assets. That could be the reason why they were more aggressive in these two assets.
Now you are pinning your hopes on Essar Steel, right? The recent NCLT order says the CoC should consider fresh bids. In which case, will you go it alone for Essar Steel?
When the five assets were available, we prioritised three assets and we focused on the three. All the five assets came together at the same time, bunched together. We could not spend our time on all the assets, so we focused on three. So after having secured only one, there was an opportunity which again opened for Essar Steel, because both the applicants were declared as ineligible as resolution applicants. So we also saw an opportunity for rebidding. We wrote a letter to the bankers saying we should be permitted. We didn’t receive any response. In the meantime, Numetal approached us.
Numetal says you approached them, but anyways...
They approached us. That’s what I am saying officially. They approached us on whether we will be able to partner with them as an investors. So, we agreed to do that. So accordingly, in the second round, we submitted our bid. But there are a few points which I would like to mention. We have made a request that in order for it to be a transparent process, they should allow even new entrants in the bidding, thereby more number of people can come in and the lenders can get better value by permitting new people.
Now the NCLT judgement is confirming to the view expressed by JSW Steel initially. That is, they (CoC) should have gone for option one where they should allow the new entrants also to submit their bids. Point two is, whoever is a resolution applicant, if there is a defaulting company for which he is the promoter, he should pay the dues before he becomes eligible. I think even this point has been corroborated by the judgement of the NCLT. So there could be a possibility that fresh bidding can come in for Essar Steel.
The bidding and NCLT processes have become a free-for-all in the various different insolvency resolutions going on. Liberty House’s late bid for Bhushan Power has been allowed by NCLT. In Binani Cements, Dalmia Bharat emerged top bidder but UltraTech has said its willing to put more money on the table and so it’s revised bids should be considered.
The Insolvency and Bankruptcy Code is a new law, which is why I think it may take some time for issues to get resolved, get settled. But there are contradictory judgements which are coming in. Even in the case of Binani Cements, if you see Supreme Court refused to intervene. At the same time, in the case of Bhushan Power & Steel, the NCLT is saying that Liberty House, which has submitted the bid late should be considered. The objective of the IBC code is to maximise the value to the creditor. So there are some conflicting judgements which are coming in. Therefore the process may take a little longer than what we are all anticipating. The way the litigations are coming, finally I think it will be resolved only in the Supreme Court.
Structurally, is this hurting the insolvency process? When you allow bids to come in after deadline or you allow people to revise their bids. Which bidder will then come to the table with its best bid in the first round?
When you compare how the process started, there is a change that only the highest bidder will be picked for negotiations with the lenders. Now the way that it is evolving, until the resolution plan is approved anybody can submit a fresh bid which could be superior to the other bids which are under negotiation. That’s permitted in the case of Bhushan Power & Steel. So if that is the way it should be done, then the way iron ore mining auctions or coal auctions are happening electronically, may be that’s a better way of settling finally the bidding process, even in IBC cases.
Otherwise anybody can come even in the last minute and submit a bid and then say this bid is superior. That will delay the whole process and then we don’t know what will finally happen. There is a lot of uncertainty creeping in. I think it is getting evolved. Maybe we have to be patient for some more time.