JSW Steel announces $900mn US acquisitions

JSW Steel Ltd., in line with its business strategy has acquired 3 separate companies in Baytown in the state of Texas in USA.  This acquisition is to expand its geographical footprint as a part of inorganic growth. The Target companies are Jindal United Steel Corporation, Saw Pipes, USA and Jindal Enterprises LLC (Target companies).  These have 1.2 mln. net tonnes of plate mill, 0.55 mln. net tonnes of pipe mill and 0.35 mln net tones of Double Jointing and Coating lines: These facilities are strategically located near a deep-water port, central to Gulf of Mexico Oil and Gas Industries, spread over 650 acres of land. With the acquisition of these 3 companies JSW would get an entry point into growing and booming Oil & Gas sector in North America, which is driving up the plate and pipe demand.  The company would enhance the income accretive business model for immediate access to customers and markets through product diversification, market diversification and geographical diversification.  The company also gets an opportunity to capture value addition from slabs to high end product namely pipes. The Board of Directors approved the acquisition of these facilities at an acquisition price of USD 0.9 billion only on completion of due diligence by internationally reputed agencies, JSW Steel will acquire 90% stake at approved enterprise valuation and the balance 10% will be retained by some of the existing shareholders.  The acquisition price of USD 900 mln works out to 6.25 times of the proforma EBIDTA for the FY 2006-07 and is comparable with the transaction EBIDTA multiple of 4.7 to 14.8 times for similar transaction in the steel industry internationally. According to Mr. Seshagiri Rao, Director, Finance "The company is confident of improving the operations substantially through various initiatives viz: quick capacity ramp-up, supply of better quality and right size slabs matching with the requirement of the target companies committing capex commitments for upgrades and improving the facilities to reduce the downtime and to achieve cost reductions with improved capacity utilization". As per Mr. Rao the funding required for completing this acquisition of 90% stake including working capital, will be USD 940 mln(comprising usd810million towards 90%stake and usd130million towards take over cost of inventory) which will be financed by a foreign currency debt of USD 380 million(recourse Debt) to be raised against the guarantee of JSW Steel and the balance USD 560 mln to be raised in the Target company. The company has further flexibility of shifting part of the recourse debt to the extent of USD 230 mln to the target company once the debt to EBIDTA covenant is complied with. The company will form wholly owned subsidiaries/step down subsidiaries in Netherlands and USA to raise finances and make investments to acquire the 90% stake. All the target companies will be merged into one single operating entity in USA through a scheme of merger subject to regulatory approvals. In other key developments, JSW Steel Limited has entered into an agreement with Orbit Corporation to buy office premises at Lower Parel jointly with Group companies in which JSW Steel share including all cost is Rs.336 crores. According to Mr. Rao, "it is now decided to acquire larger office premises jointly with Group companies at Kalina near Bandra-Kurla complex to be developed by Orbit Shelter Corporation Ltd., in lieu of the office premises at Lower Parel. JSW Steel's exposure in this acquisition will be Rs.360 crores including all costs, the new premises is in a better location and owned solely by JSW Group which would be ready for occupation in the near future. This expenditure has already been included in the overall capex of Rs.17,100 crores." In another quick development for JSW Group, the Board has approved to set up 6 modules of 500 tph Beneficiation plant (feed capacity of 20MTPA) producing 15 mtpa of beneficiated ore at an estimated cost of Rs.850 crores. While the project "� phase I (7.5 mtpa) will be completed within 12 months coinciding with commissioning of capacity expansion project of 6.8 mtpa, the phase II will be commissioned by September 2010 alongwith commissioning of expansion project to 10 mtpa. The Beneficiation plant is expected to give significant cost savings, productivity improvements due to use of low grade 58% Fe iron ore and reduction of Alumina & Silica in beneficiation process. The project cost is proposed to be financed by way of term loan of Rs.500 crores and balance out of cash accruals. The payback period is expected to be 12 months. In lieu of encashment of CER (Certified Emission Reduction) JSW has sold accrued CER (Certified Emission Reduction) of 1,337,555 at €14.90 per CER and received consideration of Rs.111.10 crores. The implementation of the project is progressing as per schedule. The company is expected to commission Cold Rolling Complex in September 2007. About JSW Steel Limited The JSW Steel Ltd., belonging to JSW group, is part of the US $ 6 billion O P Jindal Group, is one of the lowest cost steel producers in the world.  The group has diversified interest in mining, carbon steel, power, industrial gases and port facilities.  JSW Steel Limited is engaged primarily in manufacture of flat products viz. H R Coils, C R Coils, Galvanised products, auto grade / white goods grade CRCA Steel and Power.  Incorporated in 1994, it has grown to US $ 2.25 billion in little over a decade.  JSW Steel Limited has the largest galvanizing production capacity in the country and is the largest exporter of galvanized products with presence in over 74 countries across five continents.