For Mittal, Essar Steel is about ending a decade-long wait to enter India

After trying for more than a decade to get a foothold in India, the steel magnate is closer than ever to realising his dream

In the last 25 years, Lakshmi Mittal has led about a dozen acquisitions to build a global steel empire that’s just a shade shy of India’s crude steel production and about 5.5 per cent of the world’s. Some of the acquisitions were famously difficult. The auction of Essar Steel, for which ArcelorMittal has been chosen as a preferred bidder, is emblematic of one such challenge.

The Reserve Bank of India-mandated debt resolution process for Essar is more than a year old now. Much of the year was spent in court rooms with the bidders — ArcelorMittal and Numetal — fighting each other on eligibility while putting India’s new insolvency and bankruptcy law to the test. 

Essar promoter Ravi Ruia’s son, Rewant Ruia, had an indirect minority stake in Numetal, which ultimately rendered it ineligible as the company was asked to clear dues on account of Essar and other Ruia group companies.

The resolution process for Essar is now in its last lap with ArcelorMittal’s plan filed with the Ahmedabad Bench of the National Company Law Tribunal (NCLT). But the battle is not over yet. A bunch of stakeholders to the resolution process are preparing to take on the global steel major. 

The Ruias of Essar Steel, too, made a Rs 543-billion last-minute settlement offer for the company. At some point, the two offers are expected to be pitted against each other in the tribunal and court.

But ArcelorMittal is keeping the faith in the process.  

“ArcelorMittal has followed the IBC (Insolvency and Bankruptcy Code) process in good faith since first submitting its expression of interest in 2017. The company is confident that the process will now be implemented correctly and in accordance with the law,” a company spokesperson said.

Getting to this point in the battle for Essar has been challenging for ArcelorMittal. But then again, it’s a company that has grown through acquisitions. A source familiar with ArcelorMittal pointed out that they have been involved in dozens of acquisitions including the merger between Arcelor and Mittal Steel 12 years ago. 

“Each of these has been unique and the bid for Essar Steel has been no different. Fundamentally, though, this is about the sale of a large, integrated asset which requires a clear investment plan to improve efficiencies, increase production and capture the growth opportunity the steel market presents. In that sense, there are similarities with the acquisition of other comparably-sized assets,” the source said.

Past acquisitions

In some bids, Mittal, has lost but won, eventually. In 2004, an LNM-US Steel Corporation bid lost out to the son-in-law of then President of Ukraine Leonid D Kuchma for Kryvorizhstahl. The winning bid was $850 million as against the consortium’s $1.5 billion for a 93 per cent equity.

A year later, Kryvorizhstahl was re-privatised by President Viktor A Yushchenko as part of his electoral promise during the Orange Revolution. The bidding was televised live as an exercise in transparency. 

In the high voltage auction, Mittal Steel snapped up the asset in a keenly fought contest with Arcelor for $4.8 billion, almost double of what the government had expected for the six-million tonne plant.  

A year later, Mittal Steel made an unsolicited $22 billion offer for Arcelor after having failed to do a friendly deal. What ensued was a bitter battle that many believed had racial overtones. 

Arcelor rebuffed the offer that met with resistance from France to Spain to Luxembourg.  A side deal was done with Severstal to ward off Mittal Steel. But finally shareholder power saw through the deal, though the value inflated to $33.1 billion. Nonetheless, it created a producer three times the size of its nearest rival.

Price for Essar

For Essar, ArcelorMittal has offered an upfront payment of Rs 420 billion. Add to it, the dues paid on account of defaulting firms — Uttam Galva Steels and KSS Petron — and the bill goes up to  Rs 495 billion. That’s the cost of Essar, so far.

“Essar has a nameplate crude steel capacity of 9.7 million tonnes. At Rs 495 billion, the cost per million tonne is much lower than the thumb rule for a greenfield project, which is a $1 billion for a million tonne,” pointed out ICRA Senior Vice-president Jayanta Roy. 

That might give the global steel maker headroom to accommodate claims of creditors if the court finds some of it legit. 

An industry representative pointed out that the company could debottleneck at its global facilities and add the capacity that Essar represents at a fraction of the cost. 

For ArcelorMittal, however, this is not about adding capacity; it’s about entering a market that it has been wanting to, for more than a decade now. 

ArcelorMittal signed an MoU with the Jharkhand government in 2005 for a 12-million tonne plant. Unhappy with the slow progress there, it signed another MoU with the Odisha government for a similar sized plant a year later. And then, it signed the MoU with Karnataka in 2010 for a six-million tonne plant. But none of the projects took off.

“India has been on ArcelorMittal’s radar for well over a decade, so when the chance to acquire Essar Steel presented itself, we saw it an excellent opportunity to access a high-growth and large steel market. Per capita steel consumption at 70 kg, is very low when compared to the world average of 226 kg. This will grow considerably due to population growth, urbanisation and industrialisation. Economists project many years of steel-intensive growth ahead in India, and as the world’s leading steel producer, we want to participate in that growth,” the company spokesperson said. 

The spokesperson also explained that in Essar, it sees an opportunity to acquire a producing, profitable, cash generating asset. 

“The growth opportunity the Indian market presents is of a different ilk to that of the developed European and north American markets in which we operate. Those markets are growing, albeit at relatively low levels, and we have recently extended our European presence with the acquisition of Ilva in Italy, which is Europe’s largest steel facility,” the company added. 

In the first half of the year, the steel sector has grown at the rate of 6.6-7 per cent. The first quarter numbers were even more impressive with domestic steel consumption growing at the rate of 9.2 per cent, year-on-year.

Operational challenges

Assuming that ArcelorMittal gets the NCLT nod for its plan, it could still face operational difficulties.

“The Essar operations have similarities to Mexico’s so a quick turnaround is possible. But the port in Essar is owned by a different company,” explained Malay Mukherjee, who handled several acquisitions as a board member of ArcelorMittal till 2008. 

The port, Essar Bulk Terminal Hazira, and power, Essar Power Hazira, are Essar promoter group companies. 

While the port is used by Essar Steel to the extent of around 95 per cent for input materials and dispatch of products, the 270MW captive power plant is used by the steel plant. As a back-up, it can be connected to the national grid, though, as is now being done, for requirements beyond 270MW. However, these are challenges that Arcelor was well aware of.

As a source familiar with the company put it, “They haven’t become the world’s leading steel company without overcoming challenges and complexity in the numerous markets in which they operate the world over.”