JSW Steel Ltd., India’s third-largest steelmaker, will absorb its JSW Ispat Ltd. unit, almost two years after agreeing to buy a majority stake in the company to boost earnings through tax benefits.
Investors will get one JSW Steel share for every 72 shares of JSW Ispat that they own, according to an e-mailed statement from JSW Steel. The transaction “will help in realization of integration benefits of the two companies,” Sajjan Jindal, chairman and managing director of JSW Steel said.
JSW Steel’s founders will own 35.12 percent of the merged company, according to the statement. JFE Holdings Inc. of Japan, which owns a 15 percent stake in JSW Steel, will own 14.92 percent of the combined entity.
JSW held about 47 percent of Ispat before today’s announcement. The Mumbai-based company paid 21.6 billion rupees ($389 million) excluding debt for Ispat Industries Ltd. in December 2010. Renamed JSW Ispat, the steelmaker which owns a 3.2 million metric ton factory in the western state of Maharashtra, refinanced its debt in August last year, lowering its interest cost.
“A potential merger of JSW Ispat and JSW Steel would lead to a spike in net debt and deterioration of leverage ratios of JSW Steel,” Bijal Shah and Jaykumar Doshi, analysts at India Infoline Ltd. in Mumbai, said in a report on Aug. 30. “Carried-forward tax losses of JSW Ispat would reduce tax expense and boost earnings. The impact of tax benefit would far outweigh the 100 percent consolidation of Ispat’s losses.”
The net debt of the combined entity will jump 40 percent to 232 billion rupees, according to the analysts. JSW Ispat has carried forward tax losses of about 75 billion rupees, equivalent to a tax shield of approximately 25 billion rupees, which JSW Steel may use to cut its tax expenses, they said in the report.
JSW Steel fell 0.2 percent to 693.7 rupees in Mumbai yesterday, while the shares of JSW Ispat remained unchanged at 9.55 rupees. The Bombay Stock Exchange’s benchmark Sensitive Index dropped 0.6 percent yesterday.