Indian, Iranian Companies Line Up to Buy ESCO Majority Stake

EghtesadOnline: Esfahan Steel Company's major shareholder is planning to sell its stake in the veteran Iranian steelmaker and potential domestic and foreign buyers have already lined up, the managing director of majority stakeholder Social Security Investment Company said.

News ID: ۷۸۲۸۸۸

11 June 2018

Rumors had it this week that the block shares' main buyers were two domestic firms as well as an Indian company.

Morteza Lotfi, the head of SSIC, verified the rumors late last week to the Persian daily Hamshahri. He, however, declined to name any of the potential buyers.

"One of the Iranian firms will be a tough competitor to the Indians for the buy," Financial Tribune quoted him as saying.

Social Security Organization's financial obligations–paying about 750 trillion rials ($19.2 billion) in pensions every year—as well as the heavy burden of underperforming assets on its investment arm—have all prompted SSIC to try lightening its portfolio by about 120 trillion rials ($2.85 billion).

ESCO has been on the sale list for a few years now, especially since it has struggled to post profits. It is Iran’s oldest steelmaker and the largest producer of structural steel.

Jointly established in 1965 by Iran and the Soviet Union’s Tyazhpromexport Company, its steel production facilities became operational in 1972

SSIC controls a 55.99% stake in ESCO, which is listed on Iran Fara Bourse's second market with a total of 22.27 trillion rials ($530.3 million) in market capitalization. Subsequently, the potential bill for any of the prospective buyers can reach up to 12.47 trillion rials ($296.93 million), provided SSIC decides to sell its entire stake.

ESCO had planned an internal company meeting late last week to discuss the sale's base price and share volume to the Indian company. The leaked news claims part of the shares will go to the Indian buyer and leave a certain amount for the Iranian company.

Now, who can be the local buyer supposedly able to challenge a heavyweight foreign investor, as Lotfi put it?

> Major Local Buyer?

According to the same report, it is Iran's largest producer of flat steel Mobarakeh Steel Company.

There's no official confirmation, though. If anything, reports coming out in the last fiscal year (March 2017-18) had it that the government was seemingly forcing MSC to acquire ESCO.

MSC officials were clearly unenthusiastic, which made sense as ESCO was still bleeding cash because of a stagnant local market and sudden jump in raw material costs such as coal.

This can explain how a seemingly jinxed 16.75% stake in ESCO was sold in the last fiscal year–through Iranian Privatization Organization's fifth attempt–not to MSC, but to Pouyesh Commerce Esfahan Steel Company, a firm established in 2015 by ESCO and engaged in marketing the company's products.

According to its website, PCESCO is 40% owned by ESCO and 60% by 21 other seemingly steel production, marketing and service companies.

The pressure on MSC to buy ESCO could be from within, as its primary shareholder and Iran's largest state-owned mining holding, the Iranian Mines and Mining Industries Development and Renovation Organization, has previously expressed dissatisfaction with ESCO’s state and direction.

“Real privatization has not happened in the steel industry ... If companies were completely state-owned, IMIDRO could prevent crises occurring in them. Zob Ahan, for instance, was sold to pension funds ... and SSO, and they are already in financial distress ... and unable to provide for their own pensioners,” IMIDRO chief, Mehdi Karbasian, said in December 2015, using the local Farsi name of ESCO.

> Who's the Indian Buyer?

Rumors of an Indian buyer coming forward have been around since February, just days before President Hassan Rouhani's visit to India.

Chilan Online reported then that SSO officials were set to accompany the Iranian delegation to negotiate the deal with India's Essar Steel.

Essar Steel, however, was forced into insolvency proceedings in 2017 after an extended default, Financial Times reported.

The company was founded by the Ruia family into one of India’s largest producers of the metal with an annual production capacity of about 10 million tons.

A bankrupt steelmaker would be highly unlikely to buy another plant, suggesting that either ArcelorMittal, the Luxembourg-based steelmaker bidding for Essar Steel, or Numetal Mauritius are ESCO’s potential buyers. Both have not yet succeeded in taking over Essar Steel, though.