Japan steel maker's plan to buy stake in JSW comes close

Billionaire Sajjan Jindal’s promoted JSW Steel has nearly finalised a share sale agreement with Japan’s second-largest steel maker, JFE, after about six months of discussion. JSW Steel is likely to have an extraordinary general meeting (EGM) early next month to take board’s approval, said a person familiar with the development.

JFE is likely to buy a 14.9 per cent stake in the Indian company for Rs 1,600 a share, said the person. At this price, JFE would pay Rs 4,500 crore, which would be a 39 per cent premium to Tuesday’s closing price of Rs 1,150.

The promoter family of the company recently infused Rs 2,100 crore in the company through preferential allotment of 17.5 million warrants, constituting 9.36 per cent of the existing paid-up equity share capital of the company. This is expected to help the promoters to retain their current holding of about 42 per cent post the stake sale to JFE.

“The talks are on but details are not finalised yet,” said Seshagiri Rao M V S, director-finance, at JSW Steel. He ruled out possibility of any announcement this month but did not comment on the possibility of an announcement next month.

“None of the international players, including Posco and ArcelorMittal, have been so far able to set up their greenfield projects, so this is the way forward for JFE to enter India,” said Paresh Jain, an analyst with Angel Broking. “Besides, JSW will require capital for its future expansions, so it is win-win situation for both,” he said.

Mumbai-based Uttam Galva Steel did a similar transaction last year when it sold out to ArcelorMittal.

A stake in JSW Steel would help the Japanese steel maker become part of the growing economy where car and motorbike sales are setting records. For JFE, the presence in India would offset the slow growth in advanced economies such as Japan, Western Europe and the US. For JSW the investment would mean high level of technological partnership. It would also help in meeting the capital expenditure plans of the company.

JSW has planned Rs 7,000 crore of capital expenditure in the current financial year, to take its existing capacity at Vijayanagar (Bellary district of Karnataka) to 11 million tonnes (mt) from the current 7.8 mt. For this, it has Rs 2,200 crore from internal accrual and has tied up debt of Rs 4,800 crore. The company has total debt of Rs 16,173 crore and its debt to equity ratio came to 1.49. The high debt to equity ratio is a hindrance in raising further capital for expansion.

JSW Steel and JFE Corporation will also partner to take forward a proposed 10-million tonne West Bengal-based integrated steel project at Salboni, where JSW plans to start construction by 2011. The company has acquired land for the project. The project would require about Rs 50,000 crore of capital expenditure which would have around Rs 10,000 crore of equity. Here again, JFE is likely to buy stake in the project and that would infuse equity.