Debt-riddled Bhushan Steel eyes Orissa Sponge Iron takeover for survival

31 March 2015

Bhushan Steel, one of the most indebted steel producer in the country, is in advance discussions with promoters of Orissa Sponge Iron & Steel Ltd (OSISL) and Monnet Group to acquire the company and secure raw material for their ailing Odhisa plant. Little known OSISL has been a takeover target for long for its iron ore reserves.

Bhushan Steel Limited (BSL) plans to acquire a controlling 59 per cent stake in OSISL from its promoters, a Mohanty family and Monnet Group, said multiple sources directly involved. The promoters own 29.05 per cent of the company which includes 5 per cent held by IPICOL, Odisha governmnets industrial developmnet agency. Monnet Ispat & Energy has 35.17 per cent shareholding. Bhushan Energy Limited - Bhushan Group's power arm also owns 13.17 per cent, as per the latest figures available.

OSISL has been recommended for an iron ore mine in Odhisa with mineable reserves of 122 MT and an existing steel plant (set up in 1979) with a coal-based DRI production facility and a captive power plant. The plant is well connected by road and railways and has land for future expansions. This move is expected to raise eyebrows even though Bhushan Steel maintains securing OSISL's iron ore will be critical to ramp up its production; improve EBITDA margins and turn around its operations. Typically, stressed or overleveraged companies sell assets or businesses to revive their balance sheets and reduce debt. Bhushan on the other hand is planning  to spend cash on an "strategic" acquisition to reverse its fortunes. It has already sought approval and assistance from its consortium of over 40 lenders to finance the acquisition as part of a bigger long term viability plan that includes fresh funding assistance, refinancing of existing loans and asset sales of non-core assets.

Bhushan Steel, led by the father-son duo of Brij Bhushan and Neeraj Singal already has outstanding loans of Rs 44,651 crore as on December 31st, 2014, including promoter loans taken against their shares. Since September 2013, the company has been facing severe liquidity and cash flow mismatch on account of various operational delays in its flagship Odhisa plant. But the debt ridden steel maker's problems compounded last August, following the arrest of its Vice-chairman & Managing Director Neeraj Singal, by the CBI for allegedly offering a bribe of Rs 50 lakh to Syndicate Bank's Chairman & Managing Director SK Jain for extending the company's credit limit. Since then, the lenders have tightened its grip over the company, instituted a steering company to monitor its operations and even brought in independent auditors and valuers to vet its various financials and even conduct a forensic audit.

As per Bhushan's own estimate, OSISL's mine can be operational in 9-12 months from the date of acquisition. Along with raw material security, the benefits of the mine have been assumed to accrue from FY17 and lead to savings of Rs 1727 crore to BSL. In the joint lenders meetings held on 20th and 27th February, Bhushan's senior management presented a fresh funding requirement. This includes acquisition of OSISL's iron ore mine.
It is estimated, that a 59 per cent stake in OSISL is likely to cost Rs 1250 crore. Additionally, it will require fresh capex for mining and refinancing of existing lenders, thereby taking the total cost at Rs 1885 crore. Despite having its own raw material sources, OSISL has been an NPA for many of its key lenders like SBI, PNB, Edelweiss. It has taken the company 13 years, and running, to get clearances for the mine approved by the Central government and at the heart of both companies woes is delay in grant of captive raw material. However, sources add, the amount is yet to be finalized with the proposed sellers. The banks too are yet to give their final go ahead. The proposed price is a significant premium to the current market cap of just Rs 324 crore. The takeover of the controlling stake is likely to trigger an open offer for an additional 25 per cent shares. BSL plans to merge OSISL with itself subsequently.

Interestingly, this latest round of bilateral negotiations, also marks a new twist in the 6-year long, three way takeover battle over OSISL. Since March 2009, with an eye to take control of OSISL's mining resources, the corporate triumvirate of Monnet Ispat, Bhushan Energy and Bhushan Power, controlled by Brij Bhushan's estranged son Sanjay Singal have been locked in an ongoing tussle which has led to several competing open offers, legal challenges and resistance from the company's original promoters.

When contacted, the managements downplayed the matter saying discussions are still preliminary in nature. "You seem to be misinformed regarding our proposal to sell Orissa Sponge. We believe Bhushan Steel could be an interested buyer in the event we become sellers. However we don't have any deal with them, so any amount such as Rs.1250 crore quoted by you, is totally a figment of somebody's imagination and no such talks have been held with Bhushan Steel," Sandeep Jajodia, Chairman & MD of Monnet Group told ET.

Sources add, that Monnet Group - with a consolidated debt of Rs 10,737 crore as on March 2014 is also parallely in talks with potential suitors to sell a controlling stake in its power arm.

Mails sent to Neeraj Singal, BSL's VC & MD, on Saturday remained unanswered till the time of going to press on Monday. "We have not yet started any formal discussions. Its only a thought process that was discussed with bankers. We are an existing shareholders. So theoretically it makes a lot of sense," Nitin Johri, BSL's CFO told ET.
Munir Mohanty, a director at OSISL confirmed bankers had approached him earlier about the possibility of securing raw material for Bhushan's plant, and other synergies. He declined to comment if the promoter group would sell their stake, claiming he hadn't heard from Bhushans, with whom they had been engaged in a long legal battle over shareholding. Repeated calls to Vice Chairman & MD, OSISL, Dr PK Mohanty's mobile remained unanswered.


According to banking industry sources, BSL is already more than 60 days overdue with many of its key lenders. But this could not be independently verified from the lending consortium.

However, the lenders are considering refinancing approximately Rs 20,000 crore of BSL's existing debt of Rs 43,851 crore debt under the 5:25 scheme so that the repayment scheduled gets stretched long term. They are also considering providing Rs 7800 crore of additional loans to meet various capex, working capital, acquisition and refinancing requirements. If approved, this will take the total banking sector exposure to a jaw dropping Rs 48,000 crore. As per a Credit Suisse research report, BSL's interest burden in FY14 was Rs 3400 crore and in FY15, it had Rs 7200 crore of interest and principal repayment obligations. In contrast, in FY14, the company's EBITDA was a paltry Rs 2723 crore. In FY'15, banks had estimated Rs 5500 crore EBITDA but the likely figure is expected to be only Rs 2500 crore, even lower than that of the last fiscal.

"Most of the unrecognised stress is from over leveraged large corporates, which the can now choose to live in denial with, through re-financing," wrote CS analysts in a January 2015 report on PSU banks.

"This is throwing good money after bad. The Orissa Sponge mine is yet to receive stage II clearance. So what's the guarantee it will solve the purpose. Banks should have declared the account an NPA and force a change of management," said a leading Mumbai based analyst who has been tracking the ongoing developments.

However, banking sources say even if Bhushan's strategy seems counterintuitive at first, this is the only way out. Many of the lenders are in a bind over the company's turnaround in the backdrop of macro and micro headwinds. They had tried to sell the company and had even approached Sajjan Jindal of JSW and Anil Aggarwal controlled Vedanta Group. Both wanted the lenders to take massive haircuts on their exposures, as a pre-condition for the takeover. "Find a buyer in this market. It is a good asset and we need to support it. But we are also tightening our screws and forcing a slew of non-core asset sales," said a lender with significant exposure in the company. Bhushan and its promoters have also offered to divest several of its core and non-core assets to bridge the cash gap.

The detailed plan, including land monetisation, 74 per cent stake in Bhushan Energy; 100 per cent sale of its Australian mining subsidiary Bowen Energy and refund from coal blocks, is expected to help raise Rs 4050 crore between June 2015-March 2017.