India Inc may soon take a Europe tour

NEW DELHI: Mittal Steel’s mega deal with Arcelor will open the doors for other Indian steel companies to Europe, and the coming months are expected to see domestic steel companies acquiring small and medium-sized companies in Europe, industry insiders and analysts said.

They also said that the Mittal-Arcelor deal was done at an ‘almost fair’ valuation and the mega deal is now expected to lead to a re-rating of the industry. This would make it difficult for Indian steel majors to look at any sizeable acquisition overseas. “One has to look at the long-term advantages of the deal for assessing the valuation of the deal.

At one stroke, the deal will add about 53m tonnes to Mittal’s current capacity, a capacity which otherwise would have taken very many years to build. The deal also enables Mittal Steel access to technology for high end products, besides market dominance in Western Europe,” said the head honcho of an Indian steel company, who did not want to be quoted.

Industry analysts also said though the valuation ‘looks’ a bit on the higher side, it is justified because of the strategic nature of the deal. “In this case, the number one player is acquiring the number two player and becomes almost 4 times the size of the number 3 player.

In such a scenario, this kind of valuation is justified,” said Religare Securities CIO, Kunj Bansal. Mittal’s latest offer price of Euro 40.4 for each Arcelor share is about 82% premium over the closing price of Arcelor on January 26, the last working day before the announcement of Mittal Steel’s initial offer.

Industry insiders, however, said Indian companies currently do not have the financial wherewithal to make any big time acquisition within Europe or elsewhere overseas. “Indian steel companies are facing the constraints of comparatively high cost capital and lower valuations and therefore any high cost acquisitions are still much beyond their reach,” a senior Essar Steel executive said.

According to Hemendra Kothari, chairman, DSP Merrill Lynch, Indian companies could now look at the merger route to become big, provided there are no regulatory issues. “It (the deal) will pave the way for Indian listed companies to look at the possibilities of merging with international listed companies,” he said.

Mr Bansal said though there would be a re-rating in the steel sector, Indian companies would be looking at only small and medium sized companies and the valuations for these companies may not go up sharply as there would not be any strategic importance to such deals.

“Internationally, many of the steel companies are now valued at a PE of 10 to 12, while Indian companies’ PEs are way down. This limits their ability to go for any significant acquisition,” said Arvind Parekh, director (finance), Jindal Stainless.