Tata Steel to Acquire Usha Martin’s Steel Business

The company has signed a definitive agreement to acquire Usha Martin’s steel business through a 'Slump Sale on a going on concern basis'. While definitive agreement is a document that defines the final terms of the agreement between the buyer and seller, slump sale of a company means that the individual value is not assigned to the each and every asset of the company being sold and that the buyer pays a lump sum amount to the seller and not to the shareholders of the seller. Going concern concept is a basic assumption of accounting which assumes that the company will stay in business and that the value of its assets will also continue to remain in existence.

As per the agreement signed between the two companies, the closing of the acquisition is subject to fulfillment of various conditions under the agreements. Also, at the closing, Tata Steel or any of its subsidiaries or affiliates may carry out this acquisition.

Tata Steel-Usha Martin Definitive Agreement

Usha Martin and its troubles

Usha Martin’s steel business comprises of specialized 1 million-tonnes-per-annum (MTPA) alloy based manufacturing capacity in the long products segment based in Jamshedpur, a producing iron-ore mine, a coal mine under development and captive power plants.

The company is country’s one of the largest wire rope manufacturers and a leading specialty steel producer has put up its steel division on sale last year in an attempt to reduce its debt. In FY 17 the company had consolidated turnover of INR 4,375 crore but a net debt as high as INR 3,718 crore, including nearly INR 3,300 crore long-term debt. The net loss of the company during the year stood at INR 359 crore. In the last financial year, FY18, it has brought down its losses to INR 282 crore. However, the company posted 18.4% increase in revenue at INR 10.48 billion and a gross profit of INR 1.13 billion from the steel business in the Q1 FY19 ended in June.

Usha Martin’s business suffered significantly due to the global slump in steel market and falling demand of wire ropes and strands from the global oil and mining industries, which till recently were victims of low commodity prices and routine wire ropes price undercutting by the Chinese industry nursing overcapacity.

Initially, the company was trying to sell the wire rope business in order to trim its accumulated debt of 45 billion and appointed RBS to find a buyer as no one was interested in the steel asset. Later, it brought in McKinsey to come up with a roadmap for the steel business. However, as the global steel cycle turned positive, backed by strong demand and prices, interest for the steel business seemed more.

Apart from Tata Steel, other players like JSW and UK based Liberty House were the top contenders for Usha Martin's steel business.

Tata Steel’s gains

With Usha Martin's steel business acquisition, Tata Steel will increase its market share in long products division which is currently just about 2-3 MnT of its total domestic capacity of 13 MnT in India.

In India, Jamshedpur unit has a capacity of 10 MnT and Kalinganagar is a 3 MnT plant. Tata Steel Group which comprises India, Europe and South East Asia has a combined production capacity of about 27.5 MnT per annum.