JSW steels majority stake in Ispat for Rs 2,157 crore

The fragmented steel sector has witnessed its first major consolidation. JSW Steel Ltd of the Jindal Group — India's third-largest steelmaker — has proposed to buy a controlling stake in Ispat Industries for Rs 2,157 crore ($ 476 million), giving the Jindal firm the numero uno status among the nation's steel producers. JSW will subscribe to 1.09 billion shares through a preferential allotment at Rs 19.85 per share, giving it a 41.29 per cent stake in Ispat which has accumulated losses of Rs 2,470 crore and debt of around Rs 9,500 crore.

Based on the closing price of Ispat shares on Monday, JSW is buying the stock of the loss-making company at a discount of 20.44 per cent. Ispat is controlled by Pramod and Vinod Mittal, the brothers of Lakshmi Mittal. Pramod and Vinod Mittal will hold a 26 per cent stake in the new company which will be renamed JSW Ispat Steel Ltd.

JSW would also make a mandatory open offer for 20 per cent stake in Ispat to shareholders in accordance with Sebi takeover regulations.

Meanwhile, investors dumped Ispat stocks following the announcement and the scrip plunged 15.03 per cent to close at Rs 21.20 on the BSE. However, JSW Steel was up by 2.23 per cent at Rs 1,211.95. "Ispat will remain a separate listed company. The Mittal family will remain as a co-promoter of Ispat. There's no plan to merge it with JSW," said Vinod Mittal, vice-chairman and MD of Ispat.

"Dilution of holding for both the parties will occur if there is a capital raising in the future. JSW will further re-finance the entire outstanding debt of Ispat. Once financial institutions and banks convert part of their loans into equity, the promoters equity will come down marginally," Jindal said.

Ispat was forced to look for a strategic partner in view of the huge carry-forward losses and loan repayment problems. The deal that has an enterprise value of around $3 billion will make JSW India's largest steel producer with a combined capacity of 14.3 mtpa by March 2011. Sajjan Jindal will be the non-executive chairman of Ispat. Vinod Mittal will be executive vice-chairman during the transition period and subsequently function as a non-executive vice-chairman.

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