Nippon Steel raises stakes in bidding war for India’s Essar

08-Oct-2018

After hitting a snag earlier this year, Nippon Steel & Sumitomo Metal’s bid to acquire Indian steelmaker Essar Steel India is gathering steam again, raising hopes — and some fears — over the Japanese steel producer’s future.

Steelmakers around the world are competing for a slice of the fast-growing Indian market. Nippon Steel has also made its bid for Essar, India’s fourth-biggest steelmaker, central to its midterm business plan.

Nippon Steel’s current plan runs from fiscal 2018, which started in April, to fiscal 2020. Many market participants view its strategy in the South Asian country favorably. But even if Nippon Steel’s purchase of Essar goes through, the price is likely to be higher than it anticipated. This has raised concerns among some market players the Japaneses steelmaker may overpay.

Nippon Steel teamed up with Luxembourg-based ArcelorMittal, the world’s biggest steelmaker, to take part in the bidding that began in February to select investors to bail out financially troubled Essar.

The Nippon Steel-ArcelorMittal alliance is believed to have submitted an initial bid of about 300 billion rupees ($4.15 billion). The takeover attempt stalled after Essar’s creditors committee decided that ArcelorMittal was ineligible to bid. But on Sept. 7, India’s National Company Law Appellate Tribunal conditionally declared Nippon Steel and ArcelorMittal eligible, removing a major obstacle to the purchase.

Essar is an attractive prize for steelmakers that have set their sights on the Indian market.

“If we build a blast furnace from scratch, it will cost nearly 1 trillion yen ($8.91 billion). Furthermore, it will take time to complete the necessary procedures, such as certification,” said a Nippon Steel executive. Buying a company that already has a furnace will save time and money.

The Indian steel market is growing rapidly, driven by strong demand from automakers, infrastructure builders and construction companies. India’s annual crude steel production exceeded 100 million tons for the first time in 2017, and the market has strong growth potential, with per capita steel consumption still only around one-tenth that of China.

But while the business tribunal’s ruling opened the door to Nippon Steel-ArcelorMittal’s acquisition of Essar, concerns have grown among market participants since ArcelorMittal announced on Sept. 11 that it was reviewing the bid. Indian media reports said that ArcelorMittal raised its bid for Essar to about 420 billion rupees and the European steelmaker hinted that the reports were correct.

Nippon Steel has not disclosed details, such as the proposed acquisition price.

Many market participants think that under the revised takeover proposal, Nippon Steel’s investment in Essar is likely to total between 250 billion and 300 billion yen. “The acquisition will involve taking over Essar’s debts, purportedly worth hundreds of billions of yen, as well as investing in the company,” said Atsushi Yamaguchi of Japan’s SMBC Nikko Securities.

“If [the Nippon Steel-ArcelorMittal alliance] acquires Essar after further raising its bid, it will become difficult [for Nippon Steel] to recoup its investment,” Yamaguchi said.

Nippon Steel tripled its budget for business investment, such as acquisitions, under its current midterm business plan to about 600 billion yen, compared with the previous three-year plan that ended in fiscal 2017. But an official at a Japanese securities company said, “If Nippon Steel does not restrict the amount of money it spends on Essar to 300 billion yen or less, it will have few options left for other acquisitions.”

It is unclear how the bidding war for Essar will play out. Among the Nippon Steel-ArcelorMittal tandem’s rivals is Numetal Mauritius, in which Russia’s VTB Capital has an equity stake. Numetal and Indian steel juggernaut JSW Steel submitted a joint bid for Essar in the second round of bidding. Japan’s JFE Holdings holds an equity stake in JSW.

If Nippon Steel wants to remain among the big players in the global steel industry, it cannot bow out of the takeover battle for Essar easily. India’s steel market is expected to grow faster than any in the world. If Nippon Steel loses Essar to a rival, its effort to tap into that market will suffer a big setback.

On the other hand, if Nippon Steel overextends itself to buy Essar, the risk could be even greater. Nippon Steel’s stock price has been relatively flat recently, perhaps reflecting concerns about the effect of the takeover bid on its bottom line.

Although a one-to-one comparison is not possible because Nippon steel switched to International Financial Reporting Standards in fiscal 2018, Nippon Steel expects its pretax profit to rise this year, helped by higher steel prices. But the company’s estimated price-earnings ratio remains around 8, considered low for the industry, partly due to concerns about a trade war. Even if Nippon Steel is able to buy Essar under the current terms, the Japanese steelmaker’s shares may not rise if it cannot spell out how it will recoup its investment.

Source: NIKKEI ASIAN REVIEW