The Ruias-owned Essar Steel on Tuesday agreed to acquire the fixed assets and long-term liabilities of Mumbai-based Shree Precoated Steels for a little more than Rs 600 crore, a move that could signal the return of consolidation in the Indian steel industry and also give Essar Steel a major presence in the high-value steel-making category.
Although Essar Steel didn’t elaborate on the financial size of the deal, people close to the development said it is in the range of Rs 600-Rs 650 crore. Under the agreement, Shree Precoated, an unlisted firm controlled by the Ajmera group, will transfer its assets including the colour coating line, the cold rolling mill, the galvanising line and pickling line. Essar Steel will also take over the outstanding long-term debt of Shree Precoated Steel, which is currently at about Rs 175 crore, said people familiar with the development.
The deal also includes about 58 acres at Ranjangaon near Pune, where Shree Precoated has its manufacturing facility. ET had reported about the acquisition in its July 8 edition.
The acquisition will give Essar Steel a 2 million tonne capacity in cold rolled steel making, a high-value category in steel making that sells at a premium of more than Rs 6,000 per tonne, over the base grade category — hot rolled coils. CR steel and galvanised steel are used for high-end applications in automobiles, consumer goods and in constructions and are typically insulated from extreme fluctuations.
While the base grade category saw prices more than halve to Rs 26,000 per tonne in the initial months of recession, prices of CR steel fell by just about 10-15% in the same period.
“This acquisition is a strategic fit for our steel business as it gives us a leadership position in many product segments and also gives us a footprint across different product segments,” said Essar Steel business group CEO Jatinder Mehra. Global consulting giant Ernst & Young were the financial advisors to the deal which, industry executives say, could prompt a return of the consolidation wave seen five years back. “With companies focusing solely on core operations, divestment of non-core units is gaining,” said the senior executive of a large steel company that competes with Essar Steel. “Many companies had entered steel making when steel prices were firm. Now, with cost-cutting becoming top priority, such companies want to sell off these steel businesses.”
Ajmera Group MD RS Ajmera said: “We are the pioneers and one of the leading players in colour coating. We strongly believe that an integrated player like Essar Steel will be able to take this business to its next phase of growth. Ajmera Group will continue to focus on its core activity of real estate.”
OP Gandhi, CFO, Ajmera Group said: “The funds realised would be used for new business purposes like steel trading and service centre for steel products.” For the fiscal year ended March 2008, Shree Precoated Steels had sales of around Rs 1,940 crore. Subsequently, the company has undergone a substantial reorganisation through a rather complicated scheme of demerger. The Shree Precoated plant location at Ranjangaon is strategic as it is home to auto companies and is considered to be one of the largest steel consuming centres in India.