By V. K. Shrivastava & Apurva Agrawal
The global steel industry’s duress needs no introduction. Cheap exports from the global steel behemoth spurred the slowdown a few years ago that today has bent the steel industry out of shape. The situation of the global steel industry today is as far removed from being composed as it can be.
In the past couple of years, the steel industry became accustomed to words and phrases such as dumping, overcapacity, global steel glut, poor domestic demand etc. Although, in addition, there was also much talked & heard about acquisitions, mergers, sell outs & buy outs.
A Glance at Global M&As
Some of the largest consolidations in the global steel industry happened last year in China. On 1st December 2016, China Baowu Steel Group Corp was launched in Shanghai. The company, formed from the merger of Shanghai Baosteel Group and Wuhan Iron & Steel Group, is now the world’s second largest steelmaker, just behind ArcelorMittal. The two companies have a capacity of over 70 million tonne. The merger is aimed in line with the Chinese government’s strategy of improving efficiency and reducing competition and overcapacity. This strategic restructuring is being seen as a beginning of many more mergers in the country.
Essentially, the Chinese government is committed to reducing its steel production capacity via the consolidation of steel groups. Last year, China focused on clamping down on its ‘zombie’ plants and closed down about 45 mnt of its steel capacity, but this year, it is expected to target operational capacity.
Similarly, M&A has garnered attention in US. In an interview, Michael Tomera, PwC’s metals division leader, based in Pittsburgh said, “43 deals in the steel category, 40% of all deals in 2016. It looks like steel investing is back. There’s been more going in anti-dumping actions in steel than other metals categories. We can’t predict what might happen with steel, aluminium or other individual metals sectors, but it does look like anti-dumping duties will be a factor. It seems like there is a fair amount of capital available among acquirers and private equities and there is infrastructure planning going on from the Trump administration, so these are the things that have contributed to the increased share values of metals companies, in general, and steel companies in particular since the election.”
The latest M&A instance is Tata Steel selling its UK specialty steels business to Liberty House Group. The deal is worth USD 125 million and was announced on February 9th. The specialty steels unit can make around 1.1 mnt of liquid steel per year from recycled scrap. This sell out by Tata Steel is being regarded by analysts as a step forward in the right direction that will pave way for its long due JV with Germany’s Thyssenkrupp. Tata Steel’s deal with the German steelmaker has been hanging over a year after the negotiations became complicated over Tata Steel’s huge pension deficit in UK. However, the company has recently made progress with an agreement with trade unions to replace its defined benefit pension scheme – British Steel Pension Scheme (BSPS), with a defined contribution plan. This, combined with Tata Steel posting its first profit in five quarters, will further the negotiations with Thyssenkrup.
India in the M&A Spotlight
India is currently a hot-spot for M&A activities in the Asia-Pacific region. Bettering the previous best of USD 67 billion (in 2007) the deal value rose to USD 72.4 billion in the last calendar year as against 2015, this marked a growth of almost 97.27%. A close scrutiny of the figures reveal that the M&A deal value in the Power & Energy segment grew by 254%, while the Materials segment – metals which grew by 268% in comparison to 2015. India’s M&A deal traffic was largely driven by domestic investor interest. Domestic and inbound transactions, together increased by over 112% as compared to 2015, contributing over 85% to the total M&A deal values. Cross border transactions in 2016 included USD 28.1 billion worth of inbound deals and USD 8.7 billion worth of outbound deals. The rise in domestic and inbound deal values indicates strong domestic and global investor’s faith in the Indian growth story.
According to MergerMarket, the energy, mining and utilities sector accounted for the largest share in total M&A deals, largely fuelled by Essar Group selling a combined 98% stake in Essar Oil to Rosneft, United Capital Partners and Trafigura for a combined value of USD 12.7 billion. Furthermore, businesses related to cement, steel, power and toll roads are likely to contribute additionally in M&A space in 2017.
Testimony to the consolidation taking place in the Indian steel, mining and power sectors, besides the previously quoted figures, is an apparent move of the industry towards consolidation and integration to cut losses, improve margins and remain competitive.
Tata Steel’s acquisition of BRPL for INR 9 billion is the most recent example.
BRPL, which had a turnover of INR 4.52 billion in 2015-16, owned a 4 mnt pa capacity pellet plant in Jajpur and a 4.7 mnt iron ore beneficiation plant in Barbil, Odisha. A 220-km slurry pipeline connects the pellet plant with the beneficiation plant. The acquisition announcement was made on 23rd December and will take another 4 months to finalize all approvals.
Tata Steel said about the acquisition – “The acquisition provides an upstream integration opportunity to Tata Steel to meet its metallic requirements and improving the feed mix for its Kalinganagar steel plant and Jamshedpur steel plant.”
JSW’s story has been a classic example of growing through mergers, acquisitions and expansion. Starting with 1.6 mnt pa installed capacity in 2002, the company has grown to 18 mnt pa installed crude steel production capacity in 2016. Their journey has been punctuated with numerous acquisitions and expansions. Be it the acquisition of SISCOL in 2004 or merger of ISPAT in 2013; all through, it has added muscle. In line with its growth strategy, the steel giant is negotiating to acquire Monnet Ispat too.
By way of acquisition and expansions through the green field and brown field routes, JSW is aiming to achieve 45 mnt pa crude steel production capacity by 2030- 31.
Sajjan Jindal, Chairman of JSW Group, has made it clear that almost all its divisions are looking to acquire stressed assets which make strategic sense for the individual companies. He opines that a majority of the steel assets in India are up for sale and hopes to ink a deal over the next 6-8 months.
We are investing in our companies. We had made large investments in our capacities, and now it’s being absorbed into the Indian system. We are starting to look at investments and if we are ramping up investments, I’m sure others are too.
Sajjan Jindal, Chairman, JSW Group
This growth story through M&A is not restricted to just few big players but is finding equal resonance amongst the midsize and small players of the steel sector. In Chhattisgarh (major steelmaking hub in India), Real Ispat sensed opportunity in downturn and consolidated by acquiring Shivalaya, API and Gopal Krishna Steel. GP Sponge acquired NP Sponge while Rama Power and Steel gobbled up Baldev Alloys. There are many others who are waiting for the right time and opportunity to consolidate. While some are in lookout for cheap debt to fund their acquisition plans while others are still contemplating if fund infusion is the right way to expand.
The steel sector is not just replete with success stories of consolidation, it also has stories where the protagonists could not strike a balance between firm’s valuation and their expectations and have eventually missed the bus.
In the power sector, JSW Energy, which acquired two hydel power plants from the Jaypee Group in 2015 and a 1,000 MW thermal power unit from Jindal Steel and Power in 2016 is keen to ramp up its presence further by acquiring stressed assets across the country. He says, a large amount of power capacity is lying idle right now, more than 50,000 MW. Only a big industrial revival can help the power sector, which will take at least two to three years. This also opens up the possibility of some stressed company looking to sell its asset, which gives JSW Energy the perfect opportunity to expand inorganically.
In the latest news from the Indian mining sector, state-owned CIL is looking to enter into strategic equity investment and production sharing agreements with the owners of operational coal mines outside of India. CIL previously had attempted acquisition of green field coal blocks. With increasing demand for coking coal and lack of appropriate technology and funds to fulfill the need, CIL has sought the strategic equity investment route to gain well with lesser risk.
“The M&A outlook for 2017 remains positive as companies look to more regularly optimize portfolios. Future-proofing the business will be a key driver of M&A as companies look for disruptive trends within their core activities and innovation outside their own sectors.”
Cement sector too joined the bandwagon and the top 5 deals of 2016 saw two emanating from the cement sector. On one hand, Dalmia Bharat and Odisha Cement merged to form the fourth largest cement maker of the country with an installed capacity of 25 mnt pa. On the other hand, Aditya Birla Group acquired cement assets of Jaypee Group thus raising its cement capacity to 91.1 mnt pa.
Strategic buy outs, investments in stressed assets, selling of stressed assets and consolidation can be a way forward in a time when losses are heavy, debts are piling up and a pick-up in demand is uncertain.
Source: Steel 360 Magazine Mar’17 Issue