Essar Steel Up After Parent Makes Deal Purchase of Canadian Firm Will Provide Access to U.S. Carmakers BUSINESS ASIA By Bloomberg

By Debarati Roy

Shares of Essar Steel, India’s third-biggest steelmaker, rose Monday after its parent company agreed to buy Algoma Steel for $1.63 billion to gain sheet mills that supply carmakers in North America. Essar Global, which owns 88 percent of the Mumbai-based Essar Steel, on Sunday offered 56 Canadian dollars, or $49.38, a share in cash per share for the Canadian company. The price is 48 percent more than the 20-day average ending Feb. 14, when Algoma said it was in talks that could lead to a takeover.

Indian companies, fueled by accelerating economic growth, are buying rivals overseas to add production capacity and get access to mature markets. Tata Steel in January bought Corus Group for $12 billion to become the world’s fifth-biggest steelmaker, while Hindalco Industries paid $6 billion for the aluminum-sheet maker Novelis.

“Companies in the commodities space are expanding abroad to reduce the cyclicality in prices of one region,” said Jayesh Shroff, a fund manager at SBI Funds Management of Mumbai. “First it was Tata, then Hindalco and now Essar. It’s been a trend.”

Shares of Essar Steel climbed as much as 5 percent to 42.5 rupees, or $1, on the Bombay Stock Exchange. When trading closed Monday the shares were at 41.2 rupees. The stock has risen 18 percent this year, valuing the steelmaker at $1.2 billion. Shares of Algoma rose 26 cents to 54.12 dollars on April 13 in Toronto. They have gained 63 percent in the past 12 months on speculation about a purchase.

Buying Algoma, whose board backed the Indian steelmaker’s offer, will provide Essar with access to U.S. carmakers such as General Motors and Ford Motor. Algoma shipped about 2.42 million tons last year, with about 80 percent coming from hot-rolled sheet. The deal is expected to close in June, said Brenda Stenta, a spokeswoman for the Canadian steelmaker.

“The rationale is to move closer to markets for higher-end products, and at the same time continue to tap cheaper local raw materials” such as iron ore, said Ashutosh Satsangi, head of research at Crisil, an Indian unit of Standard & Poor’s.

The purchase comes amid a recovery in global steel prices. Prices in China, used as a regional benchmark, have climbed 6.3 percent this year to 4,263 yuan a metric ton, according to the Beijing Antaike Information. Prices may rise further this quarter because the peak demand season is approaching and the government is closing obsolete mills to prevent a glut, the National Development and Reform Commission said March 29.

Essar has not said how it will finance the Algoma purchase. The group, headed by the billionaire brothers Shashi and Ravi Ruia owns 33 percent of Hutchison Essar that is being sold to Vodafone Group.

As part of the deal, between the third and fourth years, the group has an option to sell its stake in Vodafone Essar to Vodafone for $5 billion. Essar Group also gets the option to sell between $1 billion and $5 billion of Vodafone Essar shares to Vodafone at a price set by an independent appraiser.

“Essar Group will get this money in the future but it is using it as a stepping stone to get loans to fund expansion of their other businesses,” said Priyadarshi Srivastava, head of institutional sales at Niche Broking in Mumbai.

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