Iron ore miner Sesa Goa's push into steel production may receive a leg-up with its deal to acquire the assets of Bellary Steel and Alloys, which is lodged with the Board for Industrial and Financial Reconstruction (BIFR), for Rs 220 crore.
Through the deal, Sesa Goa acquires control of Bellary Steel and Alloys' 700 acres of freehold land in the iron-ore rich Bellary district, with a half-constructed 5-lakh tonne per annum steel plant.
With land acquisition, Sesa Goa could deploy its massive cash flow and iron ore to build out the partially-integrated steel plant. This would go a long way in improving prospects and profits for India's largest private iron ore producer.
On the face of it, the deal price appears attractive for Sesa Goa, given that expansion plans of many steel majors have been held up by snarls in land acquisition.
News reports indicate that government agencies are acquiring land at between Rs 15 lakh and Rs 20 lakh an acre in Bellary district for industrial projects. Going by this estimate, the value of land that Bellary Steel holds would be valued at about Rs 120 crore.
Though the status of Bellary Steel's expansion project is unknown, the company carried about Rs 2,500 crore in fixed assets in its balance sheet as of September 2010. This number may be partly bloated by any cost overruns or interest charges capitalised on the partly constructed project.
Prior to trading in its shares being suspended, Bellary Steel and Alloys had a market cap of just Rs 43 crore. The company became a sick unit in March 2009 after its finances were strained by its inordinately high levels of debt (put at Rs 3,271 crore by September 2010).
With Bellary's assets alone part of this deal, the acquisition may not impose a big strain on Sesa Goa. They held cash balances of Rs 8,230 crore by December 2010 and expected to fund the Rs 13,000-15,000 crore required for acquisition of a 20 per cent stake in Cairn India, partly through debt. This deal is currently awaiting regulatory approvals.