Essar Makes $1.1 Billion U.S. Deal
It's an acquisition with a difference. The Essar group put in two separate bids: one each for the integrated steel maker Esmark and its wholly-owned Wheeling-Pittsburgh (WPC). After a prolonged discussion of over two months, the Essar group managed to win over the Esmark board to acquire the parent company, outbidding the Russian steel maker OAO Severstal.
Also, it settled scores with Severstal, which a few weeks ago outbid Essar in its bid to buy Sparrows Point of ArcelorMittal.
In the bargain, the Essar group offered a deal with an enterprise value of $1.1 billion and got the foreign company with a capacity of 3 million tonne per annum (mtpa) and its service centres in the US. It helps Essar emerge among the world's top 15 steel makers from its current ranking of 20.
Industry sources said the foreign company's service centres will be an important asset of the Essar group. Esmark runs 11 centres across the US under Esmark Steel Services Group.
"The Esmark board was undecided on whether to sell the company in entirety, or sell a part (WPC). So, the Essar group had to put in two bids," said Prashant Ruia, director of Essar group, adding it was a negotiated acquisition. Essar did not buy Esmark through auction. UBS was the advisor to Esmark while JP Morgan advised the Essar group on the acquisition.
The Essar group will chip in a further $500 million in the next five years, said Mr Ruia. "The acquisition will bring in more synergy in the group's North American operations where it had last year purchased Algoma and Minnesota Steel. Minnesota's iron ore reserves of 1.4-billion tonne will come handy to meet the raw material requirement of Algoma and Esmark.
With Esmark's service centres under control, the Essar group will now have the entire steel making and distribution chain in place. We now have production capacity of 7 mtpa, including Esmark's 3 mtpa, in the North American markets," he said. The group is investing $500 million in Algoma and $1 billion in Minnesota. It targets to double its capacity to 20 mtpa in India, Asia and North America by 2012.
The acquisition—technically it is described as merger as the shares of Esmark will be acquired through a tender—will witness a subsidiary of Essar purchasing shares of the Nasdaq-listed company for $17 a piece. If greater than 50% shares are tendered, a second step merger will follow in which the remaining shares will be converted into the right to receive $17 a piece. Going by Esmark's 41.5 million outstanding shares, the equity part of the acquisition should be around $700 million. It has a debt of around $300 million.
The Essar group will fund the equity part of the acquisition through a mix of internal accruals and debt. Industry sources, however, said the group may have to fork out a little more to raise funds in the international markets, given the tight credit scenario. Esmark will also receive a term loan of $110-million from Essar to refinance its existing term loan and to provide additional liquidity. Nearly $79 million of the new financing will be used to pay off a loan to WPC from the emergency steel loan guarantee programme, with the remaining to be used to improve its liquidity.
Esmark's management arrived at the table with little cash. The combination of a tight credit market that made it difficult to secure funding, along with rapidly rising raw material costs, have forced it to look at the Essar offer, said a banker.
"The proposed merger with Essar is the culmination of an extensive review of the strategic options available to the company that included exploratory discussions with a number of potential partners," said James P Bouchard, Esmark's chairman and CEO, in a statement Wednesday. Essar's vision for the future of Esmark is 'outstanding', not only for Esmark and its employees but for the US steel industry as a whole, said Bouchard in an analysts meet on Wednesday. "We see (Essar) as the absolute best partner for us... There is nothing, but growth plans going forward," he added.
In 2007, Esmark incurred a net loss of $9 million in contrast to net profit of $3.5 million in 2006.
Its sales increased 42.8 % to $825.6 million in 2007. It reported an operating loss of just under $1.6 million for 2007.