Liberty's India constraint: Reassuring lenders remains a tall order

How does Sanjeev Gupta turn around businesses when pedigreed groups have failed? The question confronts the Ludhiana-born British businessman each time he scoops up assets to create his $20-billion steel, aluminium and renewable energy empire from an obscure trading company five years ago.

On October 16, Liberty Steel Group — part of GFG (an acronym for Gupta Family Group) Alliance, a collection of businesses and investments owned by Sanjeev Gupta and family — announced that it had made an offer to acquire thyssenkrupp Steel.

If it materialises, the deal would be Liberty’s biggest, combining Europe’s fourth- and second-largest steelmakers. Liberty Steel has annual revenues of 13 billion euros and thyssenkrupp Steel Europe about 9 billion euros. Little is known about how the deal would be financed except that it is supported by several financial institutions.

The powerful IG Metall trade union is already opposing it and seeking state support for thyssenkrupp Steel. There could be potential suitors such as Sweden’s SSAB too.

Before the Liberty offer, Tata Steel and the German steelmaker agreed to merge in 2018, but the deal was called off following objections from the European Commission anti-trust authorities.

In the UK, the decline of the steel industry — exacerbated by high costs and imports from China — has been sharper than the rest of Europe. Amid the crisis, Gupta restarted his Newport plant, his first acquisition in 2013, in Wales after a two-and- a- half-year struggle. After Newport, Gupta got into serial deals; Caparo Tubular Solutions — a core business of Swraj Paul’s Caparo Industries — was acquired in 2015 and Tata Steel UK’s speciality steel business plants for 100 million pounds in 2017.

The Tata Steel acquisition secured 1,700 jobs and made Liberty one of the UK’s largest steel and engineering employers. In three years, Liberty has expanded steelmaking (the second electric arc furnace was switched on by Prince Charles) at the Rotherham unit and returned the business to profitability. However, in 2019, it was impacted by a weak steel market owing to Brexit and then Covid-19.

Most companies are trimming operations in the UK, but Gupta believes it is a good market, consuming over 10 million tonnes of steel and with prices higher than the rest of Europe.

“We can remodel the business and instead of making primary steel from iron ore and coal — that are imported and carbon-intensive — we see an opportunity to recycle scrap,” Gupta explained (the UK is one of the largest scrap exporters).

But Gupta’s secret to success is the “remedy deals”. Last year, Liberty bought seven major steelworks and five service centres in seven countries from ArcelorMittal for 740 million euros, its biggest deal so far. Arcelor had to sell the plants to satisfy regulatory requirements for the acquisition of Italian steelmaker Ilva. Then Alvance — the GFG Alliance’s aluminium vertical — bought Aleris’ plant in Duffel Belgium from Novelis for 310 million euros. The divestment was a condition Novelis had to meet to buy Aleris. These are high-quality assets that would not have normally come up for sale. In the last five years, over 5 billion euros has been spent on the plants acquired, including investments in them, raising eyebrows. Most questions about Gupta’s unlisted empire centre on his unconventional funding model.

One model is the receivables facility. According to the Financial Times, the European steelworks deal was funded by a receivables facility three times the deal price. Liberty declined to comment on specifics of its mergers and acquisitions.

The FT also reported that billions of euros have come from SoftBank-supported Greensill Capital to facilitate GFG’s expansion. Sources close to Liberty said this was a question for Greensill/Softbank.

Plus, the four-year-old Wyelands Bank, which Gupta owns, is under scrutiny by the UK’s watchdog for breaching the cap on related-party transactions with GFG entities. “Wyelands are an independent bank and we cannot speak on their behalf,” sources close to Liberty added. The bank’s website shows Gupta as promoter but stated that it was managed and operated independently of him.

In any case, Gupta pointed out, “That was yesterday. We will not lose our ability to be creative in accessing new forms of finance because that is our key strength but we will rebalance with conventional funding such as long-term loans, bonds, or even the equity markets.”

There is nothing conventional about Gupta, who set up his trading firm from a student apartment while he was studying economics and management at Cambridge in 1992. Gupta cut his teeth in business by selling bicycles in Turkey (the family-owned Victor Cycles in Punjab that supplied bicycles and bicycle parts worldwide).

But his unconventional methods have not made an impression on Indian lenders, despite three attempted bids under the insolvency code since 2018) — Bhushan Power and Steel, Amtek Auto and ABG Shipyard. Though Liberty initially bagged Amtek, it did not implement the resolution plan citing misrepresentation and irregularities in information relating to the corporate debtor. The resolution plan for ABG was rejected by lenders. In Bhushan Power, lenders felt Liberty’s finances were not fully tied up and therefore rejected its bid.

Liberty’s eventual entry into India was a modest one-million-tonne steel plant, Adhunik, based in Odisha in a Rs 425-crore cash deal under the insolvency law.

“His model is a leveraged buyout and in India it is difficult if you are not an established group,” explained a lender with exposure in one of the assets for which Gupta was bidding. But Gupta said, “We will examine every opportunity that comes up in India — small or big — in steel, aluminium and renewable energy. There is no way we will stand idle with a million tonnes only.”

With mega assets largely acquired, Gupta is pursuing a “string of pearls” strategy instead of a “diamond”. He is on the lookout for small assets of 1 to 1.5 million tonnes and may even consider a greenfield plant.

How will he reassure Indian lenders? Gupta believes that restarting Adhunik will set an example. Success has its own followers, he thinks.

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