Can ArcelorMittal Succeed With Essar Steel When It Failed With Uttam Galva?

For at least over a decade now ArcelorMittal has had big ambitions for its India venture. The global steel giant's most serious effort to establish a business in the country was made in 2009 when it invested a reported Rs 500 crore to acquire a 29 percent stake in cold-rolled and galvanised steel manufacturer Uttam Galva Steels Ltd. It also signed a co-promotership agreement with the founders of Uttam Galva – the Miglani family.

For the year ended March 2009, Uttam Galva reported a profit of Rs 100 crore on a revenue of Rs 4,372 crore. But in the last nine years the company's fortunes declined and by April 2016 accumulated losses exceeded its networth thereby becoming a ‘sick' company under Indian law. Last year, Uttam Galva reported a loss of Rs 445 crore on a revenue of Rs 4,357 crore, according to its filing with the stock exchanges.

During that period, Arcelor Mittal was neither able to help turn around Uttam Galva nor did it succeed in its plans to build steel plants in Odisha, Jharkhand and Karnataka.

“Uttam Galva got over-leveraged,” said Brian Aranha, head of global strategy for ArcelorMittal in an interview with BloombergQuint. “How it came about we don't know because we weren't really involved in the management of the company itself.”

In February, ArcelorMittal suddenly exited Uttam Galva for the princely sum of Re 1 per share.

Now the global steel company, founded by Lakshmi Mittal and boasting a production capacity of 100 million tonnes, has revived its India ambition by pinning its hopes on acquiring debt-laden Essar Steel Ltd. Promoted by the Ruia family, Essar Steel is an integrated steel manufacturer with a 10 million tonne annual capacity. In 2017, it was one of 12 companies picked by the Reserve Bank of India for resolution under the Insolvency and Bankruptcy Code.

Essar Steel's size is what attracted ArcelorMittal despite there being four other steel companies on the block, said Aranha.

Besides the general experience of turning around companies in many countries, ArcelorMittal has specific know-how in the types of operations run by Essar Steel, claimed Aranha. For instance, he said, “they have a thin slab casting and a continuous hot strip mill behind that, we have those operating in our company”.

In the battle for Essar Steel, ArcelorMittal is up against Numetal – an investment vehicle backed by a VTB-led consortium. Numetal counts amongst its backers Rewant Ruia, the son of Ravi Ruia. This connection could fall foul of the amended IBC that bars promoters of non-performing assets from bidding for these assets.

ArcelorMittal's bid is also under a cloud thanks to its past association with Uttam Galva, a non-performing asset. The IBC eligibility criteria disallow bidders connected to NPAs.

Also Read: What It Takes To Become A Suitable Bidder

ArcelorMittal believes it is eligible now to acquire the Essar Steel assets, said Aranha. “Section 29(A) of IBC is meant to keep out wilful defaulters, ArcelorMittal certainly isn't one,” he added.

A decision on the two bids is yet to be taken, and may be delayed due to these complexities. Aranha wouldn't comment on whether the global steelmaker is setting up for a protracted legal battle.

He also offered limited information regarding other issues that could complicate the acquisition process. Such as an Odishsa pellet plant and slurry pipeline that is a critical supplier to Essar Steel and the ownership of which is currently under contention. Or whether the facilities of Essar Port, critical to the operations of the steel business, will continue even after the acquisition.

Aranha said

• ArcelorMittal will let courts decide on pellet, slurry pipeline assets
• The resolution plan details plan on securing supplies currently coming from Essar's port

Also Read: The Orissa Slurry Pipeline That Could Muddy Essar Steel's Insolvency Bid

Essar Steel is currently at the centre of the Luxembourg-based company's India plans. If it succeeds it has aggressive expansion plans to ramp up capacity and expand the business.

If it doesn't, it will be a wasted decade for the global steel company in India.

Watch the full interview with ArcelorMittal's Brian Aranha here:

Correction: A previous version of this story erroneously mentioned the acquisition amount as $500 million. It has been corrected to Rs 500 crore. Please note the same applies to the conversation in the video interview.