Debt-laden Ispat Industries’ last ditch attempt to salvage the company and bring in cash by infusing equity from a strategic partner has hit a major roadblock.
Its negotiations with UK-based steel trading company Stemcor for a 10 per cent stake in the company has failed to materialise. Instead, in a new twist, Stemcor now seems more keen to buy out the Ispat promoters — Pramod and Vinod Mittal.
In September this year, Ispat had announced that the company is in talks with Stemcor for a 10 per cent stake sale and a memorandum of understanding (MoU) was signed between the two.
Three independent sources following the negotiations told Business Standard the talks for equity sale “now hang in the air as both parties are not being able to agree on valuations.” The officials added: “The situation between Stemcor and the Mittals has deteriorated over the past month, as the plant has shut down due to acute shortage of money.” The official said that even after close to three months of negotiations, both the parties have not been able to arrive at a consensus. Some of the lenders have even asked Ispat’s owners to explore “a better partner than Stemcor”. The lenders however have not given any deadline in writing for firming up a partner. But in course of discussions with the Ispat management, banks have conveyed that the maximum time (for resolution) will be the end of this financial year (March 2011), the official said.
According to some of the lenders, there were also disagreements on business operations and board seat allocation. A senior official with a large public sector bank having exposure in Ispat said for the lenders the emphasis is to get the plant generate enough cash to service the debt obligations. If defaults continue, there is a threat that the account will be a non-performing asset.
When contacted, Anil Sureka, director (finance), Ispat Industries, maintained the talks going on. He refused to give any detail. Stemcor India’s Managing Director Matthew Stock refused to comment on the negotiations.
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However, the sources said that the MoU between the two was an “in principle” one and no definitive timeframe was decided upon. However, when the two companies sat across the table to discuss the details of the equity stake sale, they failed to agree. Another source in the know of the deal said, “Stemcor is still very keen on the deal but it just dragged and Ispat’s plant shutting down just made matters worse.”
Sources confirmed that the plant has been shut down for over a month due to acute cash crunch. However, Ispat, on December 2 told the stock exchanges that the plant at Dolvi is shut for modernisation and upgradation. It said, “Our company has undertaken technical upgradation of plant facilities at its steel complex at Dolvi, District - Raigad, Maharashtra involving additional integration and harmonization of facilities. With a view to facilitate the same, and keeping in mind the prevailing market conditions, the planned periodic shut-down has also been preponed to November 7 so as to coincide with the up-gradation. All the activities are in the normal course, though they have been stretched beyond the original planned time-lines due to the underlying technical intricacies. Our downstream plant at Kalmeshwar, Nagpur, Maharashtra, has been fully operational.”
Stemcor, said sources, is seeking better terms than before as the plant will need at least Rs 150-200 crore to restart and bring back to production. “ It is no longer a running plant and therefore, more investment is required to run the plant.” With 95 per cent of promoter’s equity pledged with the lenders, their vetting of Stemcor is also very important to conclude any deal and the lender consortium is still not united in their views.
Also, as part of the deal with Stemcor, the company was supposed to pay Rs 345 crore ($75 million) upfront to Ispat as advance payment in lieu of offtakes and it was this money that Ispat was suppose to route back into the operations of running the plant. So far, Stemcor has paid only $30 million and it seems unlikely it will make any further payments till the plant is restarted. Stemcor is the world’s largest steel trader whose primary business is to buy steel from steelmakers and sell it to customers as a steel marketing player.
Stemcor, however, is still keen on the assets of Ispat — including the coke oven plant and the pellet unit — and has already sent feelers to the lender consortium to take over the company along with another strategic steel producer as partner. The September MoU also included Stemcor picking up a strategic stakes in the underlying assets of Ispat. In an earlier interview to Business Standard, Stock had reiterated: “Its a good company with good fundamentals and a modern plant. It just needs backward integration to get back on its legs.