A deal between Hindalco Industries' unit and the aluminium arm of Sanjeev Gupta's Liberty Steel Group has put a spotlight on the Indian-origin businessman's conglomerate.
Is the arbitration, which the deal has gotten into, a normal course of action - especially because of changing circumstances amid the pandemic? Or, is it because the Liberty Steel Group is facing a financial squeeze?
The deal was necessitated after Novelis - Hindalco's North American arm - was asked by the European Commission last year to sell an aluminum facility in Duffel, Belgium, if it's acquisition of Aleris was to be cleared. Earlier in 2019, Novelis had agreed to buy Aleris for $2.8 billion.
In November, Novelis signed a deal with Alvance, the aluminium arm of Liberty Steel Group, to sell the unit for Euros 310 million. But after paying Euros 210 million, Alvance is yet to pay the remaining amount, forcing the arbitration.
"We believe that is a fair price and they have signed an agreement and will have to pay," Hindalco Industries Managing Director Satish Pai said during a media interaction earlier in November.
Responding to a query from Moneycontrol, a spokesperson for Liberty Steel Group said, “ALVANCE Aluminium Group completed the deal to acquire the Duffel recycling and rolling mill. This E100m is the subject of an agreed arbitration process, which is part of the transaction. The arbitration mainly relates to impacts on the state of the business due to COVID. ALVANCE Aluminium Duffel remains well funded and the arbitration will begin in 2021 as scheduled unless a settlement is agreed in advance.”
Sources in the know added that Liberty Steel Group believes "the deal is complete at Euros 210 million, which is what its considers was due under the deal given the impact of COVID-19. Novelis do not agree and hence the arbitration”.
Novelis, on its part, needed a speedy completion of the asset sale to ensure the Aleris acquisition got cleared at the earliest. Liberty now owns and operates the unit.
The rethink may have come about after Hindalco was forced to sell one of the Aleris assets in the US, much lower than its fair value. The asset was one of the two units that the company had to sell to get a go-ahead from the US Department of Justice for the deal.
Though initially over a dozen suitors lined up for the unit in Lewisport, post the pandemic struck, only private equity companies remained. Hindalco, eventually, sold the unit to American Industrial Partners, a private equity investment firm, for $170 million, half the fair value.
To read more about the deal: Why was Hindalco Industries forced to sell the US asset below fair value, leading to a dent in Q2 net profit?
At the same time, Alvance's reluctance to pay the full amount, and depending on how the arbitration goes, may bring relief to Liberty Steel Group.
"Globally, the steel industry is facing a glut of supply. Though demand has improved in the last couple of months, the situation is nowhere close to the pre-COVID-19 levels," said a senior executive in the steel industry.
It's not just Liberty Steel Group. Nearly all steel peers, including ArcelorMittal, thyssenkrupp and Tata Steel's European operations are on the same boat. Interestingly, Liberty is in the running to acquire thyssenkrupp's steel operations. The thyssenkrupp acquisition alone can cost about $10 billion.
Liberty had earlier this year set off measures to control costs. It laid off employees in the UK and Australia. In June, the Gupta family’s GFG Alliance, which includes the steel business, said it wants to cut costs by 30 percent and reduce the cash burn in a tough market.
In Australia, where a local daily The Australian - in a report on November 15 - said Liberty Steel Group incurred a loss of Australian dollars 124 million in the last financial year, senior officials have asked the local government against giving any further aid to the company.
It is a crucial time for Gupta, whose metals empire now spans more than 200 locations in four continents. These units employ 40,000 people and churn out 18 million tons of steel a year, generating revenue of about $12 billion. Little though is known more of its finances, as it is privately held.
The GFG Alliance, which is owned by Gupta's family and is the holding group company of all businesses, had last year promised to release consolidated accounts in early 2020. Later, group companies changed their accounting years to end in June, from March. But in April, the change was taken back.
In an interaction with Moneycontrol, soon after making his interest for thyssenkrupp official, Gupta reiterated that he has "support of the banks”.
With several deals taking shape in multiple locations across the world, Gupta, industry observers say, should do more to instill confidence. "Support, both from banks and local government, will be crucial for the deals to go through. Also, many of the units that the company owns are being turned around, stressing the need for financial discipline," says a industry executive who has worked in multiple locations across the world.
Interestingly, sources in the know say that while Liberty Steel Group is "serious and committed" about the Alvance-Novelis deal, the arbitration will hand the company more time. "An arbitration can take up to a year," said one of the executives.
The story headline and text was updated after it was learnt that Novelis has already handed over the unit to Liberty, and the arbitration is being done, post the closure of the deal.
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