Merging to steal, or simply a great deal? (22 April 2001)
Last month, the top honchos of six FIs discussed merging the steel businesses of 8 firms that have been bailed out in the past — all units have, predictably, found to be unviable on their own
Last month, the head honchos of six financial institutions met to discuss a highly sensitive note on the steel industry put up for discussion by the Unit Trust of India. The contents of the note were so dramatic that it has remained under wraps for several weeks after the meeting.
In their most honest admission about the status of mega-steel projects financed by financial institutions, the note says that eight big steel projects funded by them may only be marginally viable despite recent restructuring. It also says that unit-wise restructuring proposals, which had been resorted to so far, may not be workable and a different approach was required.
The note proposes that steel-related assets of two companies each of the Essar, Jindal, Mittal and Lloyd Steel groups should be merged to form one massive, professionally-managed company. It contends that these units when combined would be ‘unbeatable’ and could produce ‘cost effective products’ with ‘tremendous export potential’.
The eight companies proposed for such a merger are: Jindal Vijaynagar Steel and Jindal Iron & Steel Company; Ispat Industries and Ispat Metallics; Essar Steel and Hy-Grade pellets which was recently spun off from Essar Steel and Lloyds Steel and Lloyd Metals.
Together, these steel companies would be in a position to notch up capacity of six million tonnes per annum of pellets, 3.15 million tonnes of sponge iron, 7.38 million tonnes of hot rolled coils, two million tonnes of pig iron etc. Apart from this, these companies have majority stakes in power plants with a combined capacity of over 1000 MW.
The financial institutions were aware that such a drastic suggestion would create a furore — the UTI note was restricted to chairmen and CEOs only — and the discussions did not lead to a decision.
However, it is only a matter of time before the institutions are forced to adopt extreme methods to protect their exposure to the steel sector. As the note points out ‘most projects have seen cost and time overruns several times’ and this has been funded mainly by institutions’ because the promoters have all expressed their inability to cough up any further funds. The politely-worded note does not say that steel companies continue to default after restructuring but merely hints that ‘viability of the projects would be further affected if implementation is not on schedule.’
The merger is justified in terms of a reduction in costs. For instance, centralised purchase of consumables would lead to a Rs 200 crore saving, also, the merged company would save transportation costs on domestic sales as well as exports. For example, it says: ‘Essar sells to Uttam which is next door to Ispat; JVSL sells to Jisco which is next to Ispat; Ispat sells in the South, which is next to JVSL and to Nagpur which is next to Lloyds.’
The note also claims that a merger could lead to a price improvement adding nearly Rs 500 crores to the bottomline. This seems to suggests without debilitating internecine rivalry, there could be a cement-cartel style increase in steel prices. The note suggests the appointment of one of the top valuation agencies to study the assets of all companies and work out a merger ratio. It even talks about inducting a strategic partner into the merged, professionally managed company.
Curiously, while the note indicates desperation, it does not assess the fate of individual projects. Informed sources insist that despite the ‘sacrifice’ of a few hundred crore rupees by the lenders, the recently wrangled concessions by the steel companies have not improved their repayment capacity or their viability.
Unfortunately, the meeting did not lead to any tough decision. There is already a quite but hectic effort by steel company owners to scuttle the mega-merger proposal. It is learnt that only the IDBI and UTI are keen on pursuing a tough line while the others are unwilling to take it seriously.
The sceptics have a point. Though loan conditions in the past have included personal guarantees of promoters or, as in the case of Lloyd Steel a threat to dislodge management; such clauses have never been invoked. The Modi Rubber case of 1996 is the best example of how a warring Modi clan, still mustered enough clout to prevent institutions from dislodging them despite a collective majority holding of 51 per cent.
As expected, the tough talk simmered down at the end of the meeting and it was decided not record the discussion on the mega-merger in the official agenda. Instead, they settled for a watered-down resolution whereby FIs decided to ‘encourage consolidation of steel companies’ if such proposals were brought to them. The institutions are perfectly aware that no industrialist will come up with a ‘consolidation proposal when they could just as easily lobby for further restructuring of loans and more interest write-offs. In fact, it is de-mergers and spin-offs which have been the route to evergreening of non-performing loans — the steel industry now accounts for nearly 10 per cent of NPAs of the institutions. The exposure is so huge that it is the lenders who are now at the mercy of the borrowers.