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    Will Essar Steel help Lakshmi Mittal come home?

    Synopsis

    Lakshmi Mittal remains a top FDI draw into the country. Will Essar Steel give the world’s largest steelmaker the breakthrough he has so long hoped for?

    Modi and Mittal
    Mittal’s JV with HPCL has alredy seen investments worth $6 billion investments even as three previous attempts to set up a greenfield steel works have failed in the past.
    Mumbai: Sometime late last summer, Shashi Ruia went for tea to the palatial Mittal residence at the leafy Kensington Palace Gardens. The co-founder and one half of the Essar moniker, was recuperating in London after a health scare last year and was happy to catch up with his old friend and fellow steel billionaire Lakshmi for a laugh and a light bite.

    By November, the circumstances had changed drastically when Mittal’s son Aditya, the Group CEO of ArcelorMittal, flew in in his private jet for a whistle stop site visit and due diligence of Essar Steel’s expansive plant site in Hazira, Gujarat before flying out to Orissa.

    By then the grandest trophy of the Ruia family – one that Shashi himself had built in the 1990s to mark the arrival of Essar in the top tier of the country’s business elite – was up for grabs, going under the hammer as part of its bankruptcy proceedings and ArcelorMittal a prized suitor.

    “He was very calm and courteous, exuding a silent confidence but there was a pall of gloom,” recalls an Essar executive on site. “The tension was palpable.”

    All of a sudden the equation had changed.

    For the Ruia’s, Mittals were the barbarians at the gates. But for Laxmi and his son, after at least three thwarted attempts to build a steel plant from ground up in his country of birth, this was a golden opportunity for a big, bold homecoming.

    “I was born and grew up in India and have always remained close to the country of my birth and citizenship. We don’t yet have a steel-making presence in India,” says Mittal finally breaking his silence. “The country has been attractive to us for a long time – the outlook for steel demand growth makes it a strategic market.”

    He isn’t wrong when he says that. With the dynamics of the Indian steel sector fast evolving, much of the lost lustre is back with spreads rising 50% in the past one year, argues sectoral pundits. China’s capacity utilization continues to remain stretched on the back of environment related supply squeeze and consequently, rising steel prices in India along with softening of input costs and import restrictions are likely to drive higher profitability for the entire sector. And for a country, poised to be the world’s second largest steel producing country over the next two years that continues of be one of the lowest per capita consumer, most expect the big boys to grow through consolidation.

    “Essar is an attractive opportunity that provides access to the fastest growing steel market in the next decade,” feels Rochus Brauneiser, Head of Steel and Kepler Cheuvreux Equity Research. “A successful bid would mark the entry to a new geography for ArcelorMittal, although the company has been looking at opportunities in the country for quite some time, adds Frasier Jamieson, of JP MorganCazenove.

    But beyond the bidding war and Essar’s frenzied attempt to cling on to their much cherished 10 million tonne steel empire, industry players feel, Mittal’s calculated moves is about his business compulsions.

    “Other than Mexico, the biggest strategic gap or handicap in their portfolio he has is his lack of scaled presence in the three sustainable growth markets of China, South East Asia (ASEAN) or India,” argues a senior executive of a global steel major who wished to remain anonymous.” He can’t build capacity in Europe and is yet to get the regulatory sign off for his Italian acquisition of Ilva, US is high cost and he failed to break into India before. I would say he is desperate now.”

    In contrast Tatas trebled their operations in India to 13 MTPA within a decade after Corus even at the expense of a hemorrhaging balance sheet. As demand shrunk in Europe, they were forced to descale from 18 MTPA to 10 MTPA. “India saved them to offset the bleed from Tata Steel Europe,” explains the executive.

    THE BEST BRIDE
    For Aditya and his team, Essar Steel, despite its complex corporate structure presented the best strategic fit. “It is a fundamentally sound asset, integrated both upstream and downstream and with an attractive coastal position. We feel that our experience in all steel-making technologies makes us highly qualified to run the asset successfully,” says Brian Aranha, Head of Strategy at ArcelorMittal.

    Even then, following their tested template Mittals chose to partner with an old ally Nippon Steel for the Essar bid. The JV is similar to the one the company has in China with Hunan Iron and Steel or even with SAIL in India. With Nippon too, which interestingly has a competing alliance with Tatas in India, Arcelor Mittal have been working as partners for last 30 years in 3 projects in the US.

    “We bring more to the table by joining hands. ArcelorMittal has phenomenal technology, capabilities, world class products, we are the number one supplier of automotive steel in Europe and in other parts of the world. Nippon also has phenomenal capabilities, produces demanding products and has a lot of patents like us and together we can bring an even larger product suite, better technology. This is the no 1 steelmaker and the no 4 in the world teaming up to make a great success out of Hazira (Essar Steel),” says Aditya Mittal, CFO and newly appointed President, ArcelorMittal.

    By combining the strengths of the two giants, the resolution plan submitted for Essar involves growing the business. Sources in the know said, phase one includes restoring the nameplate capacity and then ramping it up to 18 MTPA flat steel capacity -- 12 MTPA on the west coast in Hazira itself and 6 MTPA in Paradip, Orissa on the east coast. Within the next 3-5 years, a target of 8.5 MTPA shipments has already been set and this includes new technology to reduce the dependency on natural gas as feedstock.

    “There is a lot of potential and we have the capabilities to accelerate that transformation in size, scale and product portfolio,” says Aditya.

    The top brass argues that unlike Bhushan – the other asset that the company seriously evaluated but dropped – Essar is the only scaled opportunity. “Our decision to bid for Essar was made after a detailed due diligence process which involved us looking at some of the other distressed assets and judging each of them on their merit and our ability to bring value to them,” feels Aranha.

    Numbers
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    TURNAROUND TITAN
    After being involved in 50 M&As in the past 25 years, buying distressed assets and turning them around has become second nature for Lakshmi ever since he branched out on his own, starting with one greenfield plant in Indonesia in 1976.

    Since then he has grown aggressively to lead a colossal spanning 60 countries that churns and ships out 84 million tonnes of crude steel every year. Along the way, he has negotiated oligarchs of Central Asia; hard-nosed Wall Street hedge fund managers to the Bhoomiputras of Indonesia and the supercillous European elite and even armed coups and cartels in Africa and Latin America. But throughout his model has been to buy low the unwanted assets of other steel groups or snap up worn out state-owned plants. “He’s always seen an opportunity in things most thing is worthless,” says Tom Bouquet, author Cold Steel.

    From recovering Polskie Huty Stali from the verge of bankruptcy in Poland in 2004 or Nova Hut in Czech Republic a year before to restructuring Calvert, Alabama to absorbing the transformative $34 billion merger of Arcelor and Mittal Steel in 2006, Mittal always loves a good fight. “He just sails through. You will never see him unraffled even though he has put up with a lot of flack from the French unions, NGOs and governments,” adds Bouquet.

    Associates in the steel industry feel its Mittal’s obsession to building a scale steel empire and his razor sharp eye on financial discipline has helped him to be this quiet accumulator. At a time when most steel industry was national or being nationalized and thereby parochial, ArcelorMittal was a global force.

    It’s always been an integrated approach, argues Sudhir Maheshwari, a former frontline lieutenant of the Mittal family for 27 years overseeing corporate finance, M&A, risk management and even the India and China operations.

    “You have to look at cost control, you have to look at technology gaps and operating constraints, management revamp, process overhaul, strategic recalibration… Overall, one has to go back to the drawing board and prepare a new strategy blue print for turnaround and entrust the management team to execute the same. HR and compensation policies also play a very important role,” says Maheshwari, Founder, Synergy Capital.

    And after scripting his own turnaround – the best earnings last year since 2011 after a jaw dropping $7.9 billion loss in 2015 – Mittal is once again ready to up the ante.

    “He inspires awe and fear at the same time,” says a CEO of a leading multinational investment bank. “He’s transformed his board and his management even though there has been charges of nepotism, that family run businesses often face.” “He is as global as global can be. There is Indians who have excelled in niches, but nobody has dominated a major commodity like steel like Lakhhmi,” quips Harsh Goenka, chairman RPG Group, and an old friend of Mittal from his humble Kolkata beginnings.

    HEARTBURN AT HOME
    Yet the most intriguing piece of the missing jigsaw remains India.

    Since 2005, ArcelorMittal has been trying to set up greenfield capacities first in Jharkhand, then Orissa (12 MTPA both) and then even as late as 2010 signed an MoU with the Karnataka government for a 6 MTPA plant. But nothing came from each of it. Bureaucratic delays of mines, land acquisition forced an exasperated Mittal to look elsewhere. Even the ambitious partnership with ONGC Videsh (OVL) to hunt for overseas oil and gas acreage, especially in countries where Mittal’s’ has had a steel footprint was mothballed. “The environment was just not welcoming,” agrees Goenka.

    “We had 2 JVs -- one for upstream and one for oil trading,” recalls RS Butola, former MD of OVL. “The idea was to leverage each other’s expertise, relationships. We went into Nigeria together, even got Total on board, but the initial deep-water drilling was a mixed success. Over time, the government’s focus changed and so did our leadership and the whole plan fizzled out before the global financial crisis changed the oil scene for ever.”

    After 6 years of waiting, at the World Steel Dynamics conference in New York in 2012, Lakshmi Mittal, in a rare public display of anger, finally ripped apart the Manmohan Singh led UPA government saying India was putting progress at risk and subjecting millions to remain poor longer than anticipated. A year later, his company pulled out from at least one of the three proposed steel plants in the country, costing India an investment of Rs 40,000 crore.

    “Attracting increasing foreign investment has to be part of realizing India’s potential,” argues Lakshmi.

    Local peers feel Mittal gave in too soon. “Foreign companies expect states to deliver… India is a patient watch. You need to invest a lot of productive hours for unproductive outcome,” responds a rival who has confronted the Mittal’s in a few M&A battles in India and abroad. “Vedanta, Hindalco JSW, Tatas have all had to deal with false promises, mining problems… Eventually it’s a leap of faith.” Tatas signed an MoU for Kalinganagar in 2004 with an intent to complete work in 2 years. It started only in 2011 and even today there are no mines.

    Even then, in 2009, Mittals picked up a strategic stake in Uttam Galva – a move that once again yielded no dividends and after cashing at a huge loss, is turning out to cause an awkward problem. Members of the competing consortium Numetal led by Russian bank VTB are using it as a trigger to disqualify the Mittal-Nippon bid. In a recent interview, Makram Abboud, vice chairman of VTB Capital, the dominant partner in Numetal, told ET that having been promoters in two entities – Uttam Galva and KSS Petron that went belly up after defaulting on loans -- ArcelorMittal should be barred. The Ruia family have avoided any direct part in the Numetal bid but 25% of Numetal is owned by a Singapore based trust that has Ravi Ruia’s son as a beneficiary. Most see the Russians as a proxy for Ruias, having bankrolled part of Essar Oil’s $13 billion divestment to Rosneft.

    “To run a successful steel business, you need experience. I believe our track record from around the world, combined with the track record of Nippon, speaks for itself,” says Aditya without getting drawn into a verbal duel. The company claims they had no management rights or board position and had written off the investment at least a year back.

    The uneasy wait continues as lawyers from Cyril Amarchand Mangaldas and turnaround consultancy Alvarez & Marsal prepare opinions on the legality of the bids. Scrapping both would mean start afresh and further prolonging the uncertainty over a large strategic asset.

    But is there a plan B for ArcelorMittal in case Essar Steel bid misfires?

    “The most exciting opportunity for us is Essar. We not looking at plan B. We are focused on achieving success here,” Aditya Mittal is quick to interject.

    Fortunately, even in the middle of frustration, there is positive news flow.

    Mittal’s JV with HPCL for a greenfield refinery that has already seen $6 billion investments is undergoing a 25% capacity expansion into petrochemicals that will see an additional $3.5 billion inflow till 2021. Corrosion and abrasion resistant steel for solar panels, a fast-growing segment, remains top focus. Even

    venturing into solar power generation itself with a 600 MW farm in Karnataka remains a distinct possibility. “We have recently acquired Exosun, a French company that manufactures solar trackers. This acquisition will allow us to better serve a number of our solar customers and provide a complete turnkey solution,” says Aranha.

    And most importantly, the JV with SAIL for auto grade steel is also finally taking off 2.5 years after the initial signing. As Malay Mukherjee, a former senior executive with both ArcelorMittal and Essar puts it – “May be the earlier (greenfield) opportunities did not work out, but Lakshmi should make the best use of the opportunities that have come now."


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