The big surprise: Usha Martin takes the path less trodden

KOLKATA: Specialty steel and wire ropes maker Usha Martin's decision to sell one of its core businesses — steelmaking — to prune outstanding debt, marks the rare instance of an Indian corporate borrower meeting its loan obligations through divestment.

The slump sale is a milestone in the six-decade history of the Kolkata-based company, whose board on Saturday approved the divestment of its one million tonne steel business in favour of Tata Steel for Rs 4,600 crore.

Proceeds will be used to ‘first repay existing lenders of the company’. Usha Martin will retain a profitable wire ropes unit as residual business, and has plans to scale it up significantly.


“Ours is a unique case where lenders will get paid back without any haircut,” Rajeev Jhawar, managing director, Usha Martin, told ET soon after the company's board approved the sale. "We had certain obligations to our lenders and we have kept our commitments despite the hardship.”

Usha Martin will get paid for fixed assets, with the deal being structured on a zero working capital basis. With a nominal working capital of Rs 600 crore, it is worth Rs 5,200 crore.

“The amount will be kept in an escrow account with our lead banker, State Bank of India and most of the debt will be cleared off,” Jhawar said. “It will also help us grow our wire ropes business, which has suffered due to lack of investment.” Usha Martin is among the top four wire rope players globally. With oil prices going up and strong trend in demand in Europe, the Ebitda in the wire-ropes business has improved. “We can now scale it up to a different level,” said Jhawar.

Acknowledging that the deal gives him the sorely needed elbow room, Jhawar said the profile of the buyer was the biggest relief for him. "The Tata group has had a reputation of being a fair employer. As a CEO-promoter, I had to ensure that the future of the employees was taken care of." All employees pertaining to the steel business will be transferred as part of the divestment.

Fresh from the latest acquisition that literally happened in its own backyard, a Tata Steel official said, "It is an attractive investment as the cost of building this investment with time value of money would be much higher. Usha Martin's product range enhances our portfolio with a focus on the high-end automotive and engineering segment. We get…the ability to earn cash flows from day one.”

As part of the transaction, Usha Martin has entered into afive-year deal with The Tatas for sale of steel at market price to the wire-ropes business. This will ensure a smooth transition of the steel unit within the Tata Steel fold. “Employees are also relieved since we are neighbours in Jamshedpur, the two plants being only 16 km apart, and we know each other. In fact, we consider Tata Steel as our 'elder brother,'” Jhawar said.

While the deal is to be completed within 12 months as per the agreement, Usha Martin expects to complete it within the next 5-6 months. All lender nominees and independent directors approved the deal which was passed in the board meeting with a 9:2 vote. Jhawar's father, being unwell, could not attend. SBI Capital Markets and Arpwood Capital acted as financial advisors for Usha Martin, while Khaitan & Co was exclusive legal advisor.

The deal’s successful conclusion would partly depend on Jhawar's estranged cousin Prashant, who holds a 25% share in the company. The latter is engaged in a tussle with Rajeev over control, and has opposed the sale initiative.

Soon after the announcement, a source close to Prashant questioned whether Usha Martin had mentioned how much residual debt the remaining business would carry. “Will the entire amount be used to pay banks? What about the amount due to exchequer on penalty and other unpaid dues to Jharkhand government? Can the Tatas take over the business without these issues being cleared?” the source added. He also wondered if the Tatas would be comfortable, given the family dispute due to which the other promoter family, owning equal share, have not agreed.

Referring to the case before NCLT between the brothers over the ownership and management control, the source wondered whether "the deal can be concluded without the court cases being resolved.”