Tata Steel Outbids JSW in Acquisition Race for Bhushan Steel, Making a Strategic Move in the Long Run

In our 16 Feb’18 article we have mentioned about how Bhushan Steel piled up heavy debt, incurred huge losses and landed itself into bankruptcy trouble in 2017. The last update on its insolvency proceedings was that Tata and JSW Steel were the two contenders who have submitted competitive bids for acquisition of the company (Bhushan Steel).

Now as the news has come out in the market, Tata Steel has outperformed JSW Steel and has emerged as the highest bidder for Bhushan Steel with a bid of INR 360 billion, exceeding JSW Steel’s bid for Bhushan Steel by INR 100 billion.

What made Tata Steel to overbid JSW Steel with such a huge amount?

According to industry experts, acquiring Bhushan Steel may add to Tata Steel’s debts in short term, however, this acquisition is quite a strategic fit for Tata in the long run.

• This is because Bhushan Steel has auto-grade steel manufacturing plant with a capacity of 5.6 MnT in Ghaziabad, Maharashtra and Odisha. Now with its acquisition, Tata Steel which has its manufacturing units only in Odisha and Jharkhand would be able to strengthen its position in the auto grade steel sector in Northern and Western region markets, thus broadening its geographical horizons. Auto steel is a high margin segment and currently constitutes about 20 to 25% of Tata Steel’s total revenues. With this synergy, more profits from Tata’s auto segment are likely to be generated in the coming years.

• Secondly Tata Steel already has its own iron ore mines, thus making it low cost steel producer in India. And these mines will also provide raw material to Bhushan Steel thus saving on raw material costs and generating profits from Bhushan’s assets.

• Tata Steel has a total operational capacity of 13 MnT (10 MnT in Jameshdpur and 3 MnT in Kalinganagar, Odisha). It is currently undergoing capacity expansion of Kalinganagr plant from 3 MnT to 5 MnT which is expected to be completed by 2020. Now with Bhushan Steel’s acquisition of 5.6 MnT capacity, Tata Steel’s combined capacity by 2020 is expected to reach about 24.3 MnT.

JSW Steel which at present has second highest capacity after SAIL, has total steel manufacturing capacity of 18 MnT and has plans of expansion to achieve 23 MnT capacity by 2020. This means that, by end of this decade three major steel suppliers, SAIL, Tata and JSW Steel are likely to have similar levels of high manufacturing capacities around (23 to 24 MnT per annum) in the country, thus strengthening domestic steel sector.

Current Production Capacity of Steel Majors

Source: SteelMint