Tycoons set to remake India steel as US$26b battle heats up

[MUMBAI] Surging steel prices and a new Indian insolvency law have set the stage for an industry-defining battle between tycoons and producers for more than US$26 billion of the sector's most-coveted assets.

Creditors are seeking the approval of India's new bankruptcy court to sell assets of as many as 40 firms, including steel producers. That's spurred Lakshmi Mittal, head of the world's largest maker of the alloy, and fellow billionaire Anil Agarwal to vie for control of Essar Steel India, according to people with knowledge of the matter.

Debt-laden Bhushan Steel has drawn interest from Japan's and India's biggest producers, said the people, who asked not to be identified because the information is private.

Insolvent producers including Monnet Ispat & Energy are attracting potential bidders as prices of the material soar and creditors embark on the first significant test of a bankruptcy law that's intended to encourage asset sales. Several deep-pocketed suitors have made expressions of interest for the Indian mills and some have already submitted bids for a series of deals with deadlines around year-end, according to the people.

"It just can't get better than this in India in terms of size or valuation in fully-baked assets," said Pooja Dutta, managing partner at Mumbai-based Astute Law. "At a time when too much capital is chasing too few opportunities across the globe, steel mills are set to see a bidding war as long as sales are executed in right and transparent manner."

Four makers of the alloy are among India's so-called "dirty dozen" - debtors that the central bank has ordered be taken through the bankruptcy courts. Essar Steel, Bhushan Steel, Monnet Ispat and Electrosteel Steels owe more than US$26 billion combined, the people said.

Indian producers added leverage to fund expansion plans when the economy was growing at a much faster clip. The debt soured as economic activity slowed and demand for the alloy waned amid oversupply from China.

Now that Chinese mills are closing as the world's second-biggest economy seeks to ease pollution, prices for the material are rising. Demand in India is also expected to pick up after Prime Minister Narendra Modi promised to spend more on infrastructure and power.

Creditors, armed with the new insolvency and bankruptcy law, are seizing this opportunity to get repaid. Suitors see the potential purchases as a way to acquire a bigger share of a steel market that's forecast to produce more than 100 million tonnes this fiscal year.

"This level of bidding interest from such a wide range of investors, from strategics to private equity firms, for such large operational assets has been very rare in this country," said Rethish Varma, a Bengaluru-based researcher at MarketSmith India.

Essar Steel's 10-million-tonne capacity, in particular, could immediately give a new entrant a sizable presence in an industry expected to benefit from India's plan to invest trillions of rupees in infrastructure upgrades, creating 'Smart Cities' across the country. The producer is currently restructuring its roughly 450 billion rupees (S$9.48 billion) of debt or about 770 billion rupees including debt owed by subsidiaries, the people said.

Capacity Sought

Essar Steel has attracted suitors including ArcelorMittal, the world's largest producer, and Agarwal's Vedanta, according to the people. Neither company owns significant steel-producing assets in the country.

A spokesman for ArcelorMittal said in response to Bloomberg queries that "members of our management team are conducting due diligence on steel assets available through the current insolvency process."

At the same time, if Tata Steel, India's third-biggest producer, bought Essar Steel it could ascend to the country's No 1 spot, given the new capacity it would acquire.

"As a process, we do assess and evaluate various strategic opportunities for growth," a spokesman for Tata Steel said.

The billionaire Jindal family's JSW Steel, which is also considering offers for assets, recently overtook Steel Authority of India to become the biggest maker of the material that's used in everything from automobiles to skyscrapers.

With production capacity in demand, Bhushan Steel - whose mills can produce 5.6 million tonnes of the alloy - has drawn interest from Apollo Global Management-backed Aion Capital Partners, in addition to Nippon Steel & Sumitomo Metal and JSW, the people said. Vedanta and Tata Steel are also weighing bids, they said.

"On the path to India's aspirations to have 300 million tons capacity, we will see restructuring of the industry, which would primarily involve mergers and acquisitions," said Sanak Mishra, an independent steel consultant who was the former secretary general of the Indian Steel Association. "This would enable the industry to have better finances and better business."

Operational Assets

Representatives for Essar Steel, Nippon Steel, JSW, VTB Capital and Aion Capital declined to comment, while representatives for Bhushan Steel, Electrosteel, Monnet Ispat, Vedanta, Dalmia Cement and SAIL didn't respond to requests for comment.

Aion Capital along with JSW Steel are the only bidders for Monnet in the second round of bids, with lenders expected to decide on a sale as early as this week, the people said.

Despite all the demand for assets, not everyone can bid. The insolvency law was amended last month to prevent errant founders from regaining control of firms going through the process. Those with debt classified as non-performing for a year or more who can't pay overdue amounts are barred from repurchasing.

"Strong domestic demand and protectionist measures by the government makes operational steel mills an asset to vie for," said Mr Varma.

BLOOMBERG