JFE, the world's fifth-biggest steelmaker, will buy just under 15 percent stake in the Sajjan Jindal-controlled JSW Steel for over $1 billion in a transaction that would shift lucrative auto clients of the Japanese firm to the Indian company's fold.
The equity infusion of `4,800 crore will help India's private sector steelmaker, which teetered on the brink of bankruptcy in the late 1990s because of high interest loans, cut down on debt of `17,700 crore. JFE will cap its shareholding in JSW at 14.99 percent because a shareholding of 15 percent triggers an open offer to all shareholders.
The JFE-JSW deal is the largest foreign direct investment, or FDI, in the metals space in India and the third largest involving a Japanese company and an Indian partner after the Daiichi-Ranbaxy and DoCoMo-Tata deals. Daiichi had bough a majority stake in Ranbaxy, India's largest pharma company in 2007 while DoCoMO has minority ownership in the telecom arm of the Tata Group known as Tata Teleservices.
"JFE's auto clients had been consistently asking them for a manufacturing presence in India. This deal provides a perfect opportunity for that," said JSW vice-chair Sajjan Jindal. JFE makes the outer body for carmakers such as Suzuki, Hyundai, Toyota and others.
ET had reported about the impending transaction between JSW and JFE in its April 24 edition.
Cars and two-wheelers have seen robust demand in India, unlike that in Europe, US and Japan, where the sector has contracted in the past five months. Sales of four-wheelers grew 38 percent in the previous quarter in the country, while two-wheelers were up 32 percent in the same period.
Nippon Steel, JFE's rival, had recently teamed up with Tata Steel to sell value-added automotive steel in the country. ArcelorMittal, the world's biggest steelmaker, last year became a co-promoter in Uttam Steels with a 25 percent holding to gain access into the world's second-fastest growing major economy.
Complex deal
The agreement announced on Tuesday is based on the performance of JSW's shares. JSW will issue shares if the stock reaches or rises above a price of `1,365 between July 27 and August 31. These shares will be issued at `1,500 each. If the stock does not reach `1,365 in this period, JSW would issue fully convertible debentures of the value of `4,800 crore.
If the JSW stock were to cross `1,365 during the tenure of the debentures, which is 18 months, then these will be converted into shares at `1,500 a share. If the scrip does not reach `1,365 during the 18 months from August 31, then they are automatically converted into equity shares at `1,331 a share. Shares of JSW ended down 0.8 percent at `1,160.65 on the BSE on Tuesday.
"These (two) options were considered to bridge the perception gap in valuations," said Manish Thakkar, MD and M&A head at Nomura India, which advised JFE on the transaction. The negotiations between JSW and JFE had been going on for over a year, with the Japanese company initially exploring the possibility of picking up a stake in JSW's greenfield steel project in West Bengal. Citigroup and Amerchand & Mangaldas & Suresh A Shroff & Co advised JSW Steel.
JSW Steel said its fiscal first quarter net profit grew 3 percent to `350.27 crore on a standalone basis due to higher volumes. Revenue in the April-June period grew 19 percent to `4,647 crore. The company is likely to start work on the first phase of a 10 million tonne steel plant in West Bengal by March 2011.
"We hope to start work on the Bengal steel project by end of this fiscal year," said Jindal. "We are yet to start discussions with JFE on equity participation in JSW Bengal. It is one of the items we have flagged for discussion. It is true that in November we started negotiations with JFE on Bengal, but we will explore that deal later," he added.
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