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Touted as one of the largest private equity deals in India just two years ago, the Apollo Global Management and Welspun Corp. Ltd deal has gone sour. After junking the Rs 675 crore investment, Apollo has decided to sell its 12.5% stake in Welspun Maxsteel to Welspun Corp at a steep 30% discount.
In 2011, the two had announced that Apollo will invest Rs 1575 crore in two companies of Welspun while talks of investing another Rs 675 crore in Welspun Infratech were on going. In the gamut of Rs 1575 crore investment, Apollo had agreed to pick up 12.5% stake in Welspun Maxsteel for Rs 140 crore. The company had also agreed to spend Rs 130 crore on account of capital expenditure in this sponge iron venture. The rest of the investment was for picking up 20% stake in Welspun Corp.
As on date, the Rs 675 crore investment deal has fallen off. Welspun is focussing on its core business of textiles and pipe making and has put its plans for the infrastructure business on hold.
Apollo has decided to sell its stake in Maxsteel, as well. Welspun, in a stock exchange notification said, “The Company has agreed to acquire 12.5% stake of Insight Solutions Ltd. in Welspun Maxsteel Ltd. at 30% discount to the fair market value. With this, the ownership of the Company in Welspun Maxsteel Limited will rise to 99.85%.”
At the time of the deal in 2011, Mintoo Bhandari, managing director, Apollo Global Management (India) Advisors Ltd, said, had said, "We think long term and we feel that gas-based direct reduced iron will be very effective in India in the long run. It is a very clean route to produce the kind of slabs the company wants to make. And Maxsteel’s plant is very apt for making high-quality steel slabs.”
Since 2011, when the deal was first announced, the Welspun Maxsteel expansion has been standstill because of the natural gas unavailability. The talks of investing Rs 675 crore in Welspun Infratech have also fallen off with Welspun focussing on its core business of pipe making.
As per the original plan of 2011, Apollo was to invest Rs 1575 crore in Welspun Corp and Welspun Maxsteel. The private equity player was also in talks with the company for an additional Rs 675 crore investment in Welspun’s infrastructure arm -- Welspun Infratech.
Off the three deals in Welspun, two (Maxsteel and Infratech) have fallen off in the last two years. Apollo now continues to be invested in Welspun Corp. Under the deal, Apollo was to pay Rs 1,305 crore to buy close to 20 % in Welspun Corp. The investment was through fully/compulsorily convertible debentures worth Rs 788 crore and global depository receipts worth Rs 517 crore. The debentures were supposed to be converted within 18 months at Rs 225 a share.
At 11.10 am on June 10, the shares of Welspun Corp were trading at Rs 45.95 per share on the Bombay Stock Exchange. The day Welspun and Apollo announced the deal in 2011, Welspun shares had risen 2.8 % to close at Rs 173.9 per share on the Bombay Stock Exchange.
However, the turmoil of the last two years has forced Welspun to rethink its plans. Welspun had three infrastructure companies, namely; Welspun Infratech, Welspun Projects and Welspun Leighton Contractors. The company has scaled back its plans for the infrastructure segment. Apollo is not investing Rs 675 crore in Welspun Infratech. Rs 550 crore worth, or, 72 % of the orderbook of Welspun Projects has been transferred to Welspun Leighton Contractors for a mere Rs 115 crore in exchange of a 7.5 % stake.
The investment in Welspun Maxsteel was also important in terms of the integration of its various businesses. Welspun is a big player in the steel pipes business. For Welspun Maxsteel, the company wanted backward integration in terms of iron ore mines and steel slab unit. This would have brought down its cost of sponge iron production which in turn was the raw material for its pipe business.
The plant has been running at a capacity utilisation of under 50% and at high costs because the company is being forced to buy natural gas from open market at higher rates than the contract signed with Reliance Industries for the Kg-D6 basin gas
