Essar pulls out of Esmark race

MUMBAI: Essar has pulled out of the race to acquire US steel maker Esmark after it was outpriced by Russian mining firm Severstal, ending a two-month-long tussle. Severstal has launched a fresh offer of $19.25 a share, 25 cents higher than Essar���s renewed bid, and has signed a definitive merger agreement with Esmark.

Both offers promised to absorb Esmark���s $400-million debt. But the Esmark board chose to accept the slightly higher Severstal offer mainly because it has the backing of Esmark���s main labour union and its largest shareholder.

Essar chairman Shashi Ruia said, ���Essar will continue to focus on the North America market and remains committed to increasing its capacity to about 25 million tonne globally by 2012.���

Severstal���s CEO Alexei Mordashov is known for his deep pockets and aggression. ���Essar perhaps realised that Mr Mordashov would not let anyone acquire Esmark as he wants the company badly to build a steel empire in the US that is bigger than his capacity in Russia,��� said an analyst.

Incidentally, this the second time Mr Mordashov has outbid Essar, the first was his acquisition of Sparrows Point from ArcelorMittal. ET had first reported on May 24 that Essar had fallen behind in the race.

Essar said it withdrew from the race as it believes that its $19 bid reflects a full and fair value for Esmark. ���This is also in keeping with Essar���s principle and disciplined approach towards any acquisition,��� said a company release.

Mr Ruia said in a press statement that having acquired Algoma and Minnesota Steel last year (both in North America), Essar will continue to pursue M&A transactions internationally and will look at opportunities consistent with its vision.

Essar Steel Holdings, part of the diversified Essar group, had signed a memorandum of agreement on April 30 for acquisition of Esmark for $17 a share. Severstal joined the fray a month later by launching an unsolicited offer for Esmark at the same price.

But the Essar bid ran into rough weather in the wake of opposition by Esmark���s main labour union, United Steelworkers Union. Things turned difficult for Essar when Franklin Mutual Advisors, which controls 60% stake in Esmark, followed the USW in expressing its intention to tender shares to the Severstal offer. Recently, Essar had sweetened its offer to $19 a share, but ran out of steam with Severstal offering even higher.

Now, Essar will get a break-up fee of nearly $20.5 million, as per the agreement it signed with Esmark. It will also get back $110 million that it lent Esmark to restructure the foreign company���s debt at a pre-determined interest rate.

Essar has a steel capacity of 9 million tonne per annum (mtpa). It is setting up steel plants at Trinidad and Tobago, Orissa and Minnesota with an aim to reach a capacity of 25 mtpa in four years.