Usha Martin Ltd will deposit the funds mobilised from the proposed sale of its steel business to Tata Sponge into an escrow account with the State Bank of India to ensure lenders are paid off first before the company can lay hands on the money.
The Tatas have agreed to pay Rs 4,520 crore to acquire UML’s 1-million-tonne steel plant at Jamshedpur, a captive power plant, a coal and an iron ore mine associated with it.
UML has around Rs 4,700 crore debt as on June 30, 2018, on its balance sheet in long-term and working capital loans.
At the extraordinary general meeting to ratify the slump sale on Saturday, minority shareholders raised concerns about the health of the company after the transaction, seeking details of the deal and confirmation from the board that the sale proceed would deleverage the company.
“I want to assure you that the sale proceed shall be deposited in a separate escrow account to be opened with the lead bank and repayments of existing loans are to be made. No money will be given to the company or otherwise,” G.N. Bajpai, chairman of UML, said in response to shareholders queries.
The result of the voting will be known on Monday even as the resolution is expected to be passed with requisite majority after the Prashant and Basant Jhawar faction of the promoter group publicly supported the deal.
Several shareholders said they were grudgingly accepting the slump sale and questioned whether the existing management, which could not manage the steel business, should continue after the deal. One shareholder also asked why the Tatas were not taking stake directly in UML.
Bajpai said the company and its management would remain in the present shape given that the transaction was a slump sale. “The board of directors, managing director, CFO and company secretary will continue,” he said.
The chairman also defended the deal saying it was required to reduce the debt burden and claimed that it was good for all shareholders.
“The very fact that the market has validated by price rise also speaks volume that minority interest has been taken care of,” Bajpai said. The UML stock has risen by more than 50 per cent after Prashant Jhawar supported the transaction.
Transfer of mines
Rajeev Jhawar, managing director and a promoter of UML, said the transaction could be closed within 2-3 months time.
“Tata Steel has made a CCI application. Once the approval comes, we will go ahead. Coal mine will not take more than one and half months because it was taken on auction. And transfer of iron ore mine is also simplified after the new MMDR Act,” Jhawar said.
He hinted that Tata Sponge may withhold some payment till the transfer of mines were completed. Sources said, Tata Steel would keep back Rs 700 crore from the sale proceeds till transfer of iron ore and coal mine and a patch of land adjacent to the coal mine takes place.
Future of wire rope
The wire rope business will carry residual working capital debt of around Rs 400 crore in the balance sheet. Rohit Nanda, chief financial officer of UML, said the company, the largest wire and wire rope maker in India and fourth largest in the world, is expected to make Rs 270 crore of EBIDTA annually. “Servicing the residual loan will not be a challenge,” he added.
Jhawar pointed out that the wire rope business, which accounted for 40 per cent of the Rs 4146.15 crore turnover last fiscal, was starved of growth capital as money was spent to keep the steel business afloat. He said UML had signed a 5-year supply contract with Tata Steel to procure wire rod, raw material for the company on fair market price basis.
“However, there are quite a few steel companies close by such as JSPL plant at Patratu or Electrosteel plant at Bokaro and there are a few more units coming up to produce wire rod. So there is enough flexibility even on a long term basis,” he said.
Jhawar emphasised that the deal would mean no haircut for lenders who are being paid the principal in full. There is long term debt of Rs 2,800 crore and short term and working capital is around Rs 1600 crore.
