Tata Sponge Announces Its Entry Into Steel Business
Tata Sponge Iron Limited (TSIL) has been evaluating various strategic options beyond the manufacturing of sponge iron, to enhance its product portfolio and has identified an entry into steel manufacturing in long products as a route to ensure sustainable long-term value creation for all its stakeholders. TSIL has a debt-free capital structure and free cash reserves of around Rs 670 crores, providing it with a strong financial position to enter this business. Besides the inherent synergistic and associated nature of the business, steel long products continue to see growing and robust demand in the Indian market with potential for value accretion. As part of the larger Tata Steel group, TSIL believes it would be able to leverage its brand and corporate identity to emerge as a leading player in this business with a premium positioning, leading technology, low-cost structure and a presence across value added and differentiated products. Tata Steel as the promoter shareholder of Tata Sponge has also agreed to support Tata Sponge’s growth strategy in building a globally competitive long products business while identifying itas the appropriate entity to acquire the steel business of Usha Martin Limited(‘UML’).
On 22nd September, Tata Steel Limited (‘Tata Steel’) had announced the execution of definitive agreements for the acquisition of the steel business of UML by itself or any of its subsidiaries or affiliates. The Board of TSIL evaluated independently the asset perimeter, financial forecasts, synergies, prospects and the risks of the proposed acquisition, found that it was a strategic fit with its long term goals, and has on 24th October resolved, that it will seek to acquire the business through a slump sale process and has accordingly executed a novation agreement with Tata Steel and UML to acquire the steel business of UML. The business being acquired inter-alias comprises of a specialised ~1.0 mtpa alloy based manufacturing capacity in long products segment based in Jamshedpur, a producing iron-ore mine, a coal mine under development and captive power plants. UML’s steel business has a rich product mix of carbon steel & alloy steel category which caters to automotive customers as well as produces high-end wire rods.
The closing of the acquisition remains subject to fulfilment of various conditions under the agreements. UML and
TSIL shall jointly work towards fulfilment of conditions precedent which are largely regulatory approvals required for the transfer of the business undertaking. The Board of TSIL has also adopted a financing plan for the acquisition where along with its internal cash and cash equivalent resources it would raise financing by way of a combination or part of the following:
a. Rights issuance of fully paid-up ordinary shares of the Company of up to Rs.1,800 crores.
b. External borrowings in the form of loans, debentures or other instruments of upto Rs. 2,500 crores.
c. Issuance of Non-Convertible Redeemable Preference Shares of up to Rs. 1,000 crores
TSIL will separately approach its shareholders for requisite approvals in relation to the acquisition transaction and related funding plan detailed above. Tata Steel as the promoter shareholder of Tata Sponge has confirmed its in-principle support to facilitate the above financing plan, subject to the approval of its board.