Strategy & Operations » Leadership & Management » The challenge of building a steel empire

Steel magnate Sanjeev Gupta has promised to roll his global steel companies into a single entity Liberty Steel Group next year in response to a call for a more open and transparent structure.

The group is expected to produce 18m tonnes of steel a year at its 200 production facilities employing 30,000 people, with annual revenues of $15bn, making it the world’s eighth largest steel producer outside China.

The move comes as Gupta, a British citizen,  seeks to combine upstream and certain downstream steel assets in Australia, continental Europe, the UK, and the US in the new structure. It will include steel works in Rotherham and South Wales and various rolling mills and specialist steel outfits in about 10 other sites in the UK.

The formation of the assets into one group, which will be owned outright by Gupta and his family, should go some way to address the criticisms he and his father have received in press reports over the opacity of the group of companies.

According to sources close to Gupta, their continued acquisition of companies around the world, maintaining almost complete independence from each other, reached a scale where a new model was required.

When that programme of acquisitions increased dramatically this year with the purchase of the pan-European businesses of rival ArcelorMittal for around Euro700m, growing media scrutiny demanded a clearer corporate structure and a functioning board.

The assets became available because ArcelorMittal wanted to buy the Italian steel business Ilva out of state ownership and as a condition of that transaction, the European Commission (EC) said the group had to dispose of a certain amount of steel capacity in Europe.

Liberty Steel Group, in which Sanjeev Gupta will be the executive chairman and former Essar finance chief V Ashok has been hired as CFO, is expected to produce consolidated accounts in Singapore, although an auditor has yet to be confirmed.

Addressing uncertainty

Some observers have suggested that the reason for the move to a clearer organisation is that a corporate bond or other capital markets issuance is being planned, but the group is declining to comment on the possibility. Concerns about lack of transparency are thought to have contributed to a recent bond issued for its Australian businesses raising only A$325m instead of the A$475m planned, at an unsually high coupon of 12% for a BB rated issuance.

But although the steel assets will come under the one umbrella, such is the vast network of entities in the GFG Alliance (as the group of companies is known), Liberty Steel Group won’t include Gupta-owned assets in engineering, renewable energy, property and banking.

Nor will it include the Lochaber hydroelectric and aluminium plant in Scotland, which celebrated its 90th anniversary on 10 December with an event to which leading politicians including the SNP’s Westminster leader Ian Blackford were invited.

What’s intriguing about some of the dozens of Gupta-owned companies on Companies House is that quite a few have missed accounts filing deadlines, which a spokesman for the GFC Alliance put down to the fact that “many of these businesses were in financial distress, underperforming or mothballed with multiple registered entities and underinvested accounting functions.”

The GFG Alliance spokesman says: “From time to time, companies have been late in filing. This is an unfortunate by-product of the pace and scale of our acquisition programme and the condition of many businesses whose accounts we inherited.

“We are working to catch up and are investing in central office functions, external advisers and administrative improvement within our group businesses. This reform is ongoing and is central to our commitment to transparency,” he adds.

Gupta’s acquisition from Rio Tinto of an aluminium smelter in Dunkerque in northern France for $500m last year, has also come under the spotlight, with reports suggesting challenges around the performance of the asset and that the mining giant was still owed $50m.

The GFG Alliance spokesman insists the reports were wrong and says: “As is usual practice in sizeable mergers and acquisitions, there is a mechanism in place post-completion to settle the final consideration to be paid to the vendor net of working capital, accounting and other issues. This system is ongoing with the vendor as part of the normal process and differences being reconciled.”

“However, GFG disputes the validity of the $50m, with the net sums being discussed significantly smaller than this figure. GFG’s deal to buy the Dunkerque smelter from Rio Tinto has been a very successful transaction and relations with the banks are constructive.  This smelter is operating on budget, it is highly profitable and cash generative despite poor aluminium prices,” he adds.

Growth strategy

Another aspect of Gupta’s model that has gained attention is the use of receivables to finance its growth strategy, backed by supply chain finance group Greensill.

A City source thought that there was unnecessary squeamishness about Gupta’s use of receivables, saying: “I don’t understand people’s concern with this receivables thing. Everybody I know in the commodities world who isn’t of the BHP size does receivables financing, or discounting. As far as I can tell, every asset he (Gupta) has ever bought is hedged with everything it is possible to hedge, input prices, output prices, business interruption insurance,” he says.

“If you hedge all of that, then maybe you are comfortable running a business on a slither of equity, or less equity, than a traditional buyer or sponsor would. Sanjeev’s view has been, I’m going to just accumulate as many assets as I possibly can doing this.

“It’s like back in the boom times when you could get a mortgage with 110% of the house price, to do up the kitchen, to increase the value of the house. His theory is as long as I own these assets, when the cycle turns up, I am going to make an absolute killing,” he says.

But the City source also warns that Gupta’s unconventional business model carries risks. “It is risky for sure because there is only a slither of equity and what everyone asks when something goes wrong, is how much money does he really have to put in. The biggest risk is if the music stops on any of his assets, such as the Dunkerque smelter or one of his steel plants in Australia or US,” he adds.

 

 

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