Race for Bhushan Steel: Beware of the winner's curse

Within a few years, the Indian steel company was left ruing the deal. After incurring thousands of crores in acquisition and running costs, Tata Steel is now forging a merger between its European business and German steelmaker Thyssenkrupp.

Like Corus was for Tata Steel and CSN years ago, Bhushan Steel too looks attractive to its suitors. Despite its debt of Rs 50,000 crore, for which it was referred to the National Company Law Tribunal, the best of companies have been knocking at its door for a match.

There is the Sajjan Jindal-owned JSW Steel, Anil Agarwal's Vedanta and LN Mittal's ArcelorMittal. Others in the fray include billionaire NRI Sanjeev Gupta and his Liberty Group, and state-owned Steel Authority of India Ltd (SAIL). Oh, and Tata Steel is also interested in Bhushan Steel, especially after its bid for Electrosteel Steel - another company being auctioned by the NCLT - ended up being second best to Vedanta's.

But the last date for submitting the bids have now been postponed twice, first from January 18 to January 25, and further to February 3.

Executives from the industry, who didn't want to be named, say that the banks now want to wait for the Union Budget before continuing with the auction. Finance Minister Arun Jaitley might have something to say about the taxes that a winning bidder may have to pay on the haircuts that banks would be taking on the stressed assets. As of now, the winner has to pay a tax on the amount of loan taken as a haircut by banks.

"The bidders also need the time to understand the nitty-gritty of the bid," said an executive from one of the interested companies.

A newspaper report on Thursday said that the bids might go up to as high as Rs 30,000 crore, twice the liquidation value of Bhushan Steel.

Does it make sense to bid that high for a company that produces 5.6 million tonnes of steel a year? It doesn't.

Going by the industry thumb rule, around Rs 4,500 crore is needed to build a facility that could produce a million tonnes. By that calculation, a JSW Steel or a Vedanta can use the same Rs 30,000 crore to build a new steel plant with an annual capacity of 6.5 million tons.

"But then it's not easy to set up a greenfield project nowadays," said an executive from the industry. The long list of delayed, or closed, projects may vindicate the point. Also, Bhushan Steel has access to iron ore mines, making it an even more attractive target.

At the same time, will the heat of the race blur the lines between what is viable and what is not?

Playing for the top spot

In an interview to a television channel from Davos, where the World Economic Forum is underway, Sajjan Jindal talked about his admiration for Tata Steel. "We grew up seeing the company. I have great regard and respect for Tata Steel. They ought to be number one. I'm very happy to be number two or number three."

But when pushed by the channel host on the race for steel assets in the country, Jindal added, "I like to win. I'm a tough competitor to beat..."

The entrepreneur showed that grit to emerge as the biggest steelmaker in India, taking the lead over legacy players like SAIL and Tata Steel. But with so many assets at play, including Essar Steel with a capacity of 10 million tonnes per annum, the domestic industry could see a new king at the end of the auctions. While JSW Steel produces 18 million tonnes of steel a year, its peer Tata Steel has a capacity of 13 million tonnes.

"There is a lot at stake as these companies bid for the stressed steel assets. There is also ego and prestige," said an executive.

Will emotions get the better of economic sense?