HomeLocalEssar’s Zisco takeover mired in controversy

Essar’s Zisco takeover mired in controversy

ESSAR Africa Holdings Ltd, a Mauritian-based subsidiary of Indian steel-making giant Essar Group, won the tender to take over inoperative local steel company Ziscosteel amid controversy involving greedy politicians and smear campaigns.

Information obtained by the Zimbabwe Independent shows that Essar, which apparently had its own political sympathisers, had to ward off serious pressure from politicians backing several other bidders and smear campaigns designed to influence the outcome of the process.

“It was a very controversial process,” one informed business executive said. “The initial bidding did not produce an outright winner partly because of political interference and preferences. There was also no winner because of the failure by companies to commit themselves to taking over government’s debt to KWV of Germany, Eximbank and Sinosure of China.

“Most of the big companies involved in the bidding process had political heavyweights behind them. This made the whole process fraught with political meddling and behind the scenes lobbying. In the end however Essar, after its biggest competitor ArcelorMittal had dropped out due to several reasons including political pressures, won because of its strong showing on nearly all the important fundamental requirements.”

The bidding process which started last year was initially stalled but was reopened recently after a directive to that effect by President Robert Mugabe, according to information contained in official government documents on the issue.

In response to Mugabe’s order, Minister of Industry and Trade Welshman Ncube then set up a three-member committee to deal with the bidding process against a background of continued haemorrhaging of Ziscosteel and decline of value.

The team was specifically tasked to conduct preliminary interviews to establish the ability of the companies to deal effectively with the central issue of the clearance of Ziscosteel’s US$240 million debt.

The companies were further required to satisfy the panel they had the financial capacity and ability to work on capital projects which included the resuscitation of the blast furnaces and coke oven batteries.

The committee was also expected to establish whether the potential bidders had experience in steel production and a strategic plan to complete the company’s restructuring process. It was also supposed to conduct a reverse due diligence on the bidders with emphasis on business plans and cash flows for investment in the rehabilitation of plant and equipment, expansion of product lines, value-added activities and introduction of new technology.
Other issues to consider were proposals to take over the debt, how much government was going to get from the transaction, forecast financial performance of the company, history and experience of the bidder, assurances to keep current employees and prospects of new jobs and safety, health and environmental issues.
So Essar Africa won after beating the last three bidders on these requirements.

During the process 12 companies were interviewed after the bidding was opened to the wider community through the press. These companies included Jindal Steel, Sino Zimbabwe, Essar Africa, Sovereignty Capital, ArcelorMittal, China Metallurgical Group Corporation, Arcadia Steel Energy and Mining, Apollo Steel, Zimlantic Export & Import (Pvt) Ltd, Posco, AMC Corporation and Murray & Roberts.

From the 12 listed companies, eventually only five purchased the bid documents and out of that four (Jindal Steel, Sino Zimbabwe, Essar Africa, Sovereignty Capital) were able to submit their bids within the prescribed deadline. However, Sovereignty Capital’s bid was mainly on financial advisory services.

Jindal Steel and ArcelorMittal were not subjected to a reverse due diligence exercise because they had participated in the previous bid process. Posco eventually declined to participate, citing difficulties in remitting fees for the purchase of bid documents and tight deadlines.

The selection criteria outlined in the Bidder Evaluation Form included the debt takeover plan, financial capacity, technical ability, how much government was going to get for its shareholding and issues of safety, health and environment.
The debt issue was critical because the whole point of selling Ziscosteel’s majority shareholding was necessitated by government’s failure to pay its liabilities.
On the debt issue, Sino Zimbabwe had simply offered to negotiate without making a clear commitment to liquidate the debt. Jindal Steel had offered to restructure the debt, while Essar committed itself to clearing the whole debt.

Regarding financial capacity, Sino Zimbabwe did not provide audited accounts as required, while Jindal provided that showing an average balance sheet size of US$272 million. Essar’s accounts showed it had a balance sheet size of US$3,4 billion.

The financial statements showed that Jindal and Essar had more or less the same relative profitability ratios. Jindal had a higher (59%) gearing ratio compared to Essar’s 23%. Given that the gearing ratio is generally a measure of a company’s exposure to debt obligations, Essar as result demonstrated a greater capacity to borrow or raise capital compared to Jindal.

On the technical side, Sino Zimbabwe was easily knocked out because it does not have any experience in the steel industry, despite that it had China Shougang as its technical partner. However, the trouble was that Sino Zimbabwe did not produce any documentation showing it had a contract with China Shougang to work together.

When the bids were further unpacked, Essar had an advantage over Jindal in that it offered a short start-up production period compared to its competitor. It would take Jindal two years to come into meaningful production whereas Essar said it could do that in a year’s time.

More critically, Essar presented a comprehensive and detailed turnaround programme with specific milestones compared to Jindal. Essar also beefed up its strategic and turnaround plans with targets to generate electrical power, construct a new bar and rod mill, as well as a new coke oven battery to enhance production and viability of Ziscosteel.

Whereas Jindal were also able to indicate they had capacity to generate power, they were not clear on the turnaround plan schedules and targets.
On value addition both Jindal and Essar produced plans to ensure that by proposing to build ferro-alloys production plants, key components in producing stainless steel which fetches a premium price of at least US$10 000 per tonne compared to long products’ average price of US$800 per tonne and flat products that are US$2000 per tonne.

On payment for government’s shareholding both Jindal and Essar offered US$45 million, but the former did not provide a payment plan while the latter offered to pay US$25 million on signature and US$20 million after 12 months. On the strength of all these considerations Sino Zimbabwe scored 52%, Jindal 60% and Essar 81%.

In the end Essar was awarded the tender to buy 60% of government’s shareholding in Ziscosteel, much to the chagrin of politicians backing losing bidders.


Dumisani Muleya

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