After considerable speculation about the fate of two said-to-be strategic steel mills in northern France — left over from the rump of British Steel — Sanjeev Gupta’s GFG Alliance/Liberty House Group is reported in the Financial Times as being approved to take over the two plants.
The French had refused to allow their sale to British Steel’s buyers, the Chinese Jingye Group. because of its unique role in supplying rails for the French high-speed rail network and Paris Metro.
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Integrating Hayange, Ascoval mills
The plan will see the Hayange mill in Moselle, which manufactures rails, to be supplied with steel made from recycled scrap at the Ascoval plant in Saint-Saulve.
As a result, Liberty will bring the two together as a combined business.
The group’s largest acquisition to date is the $500 million purchase of Rio Tinto’s Dunkirk aluminum smelter in 2018. The purchase marked a move into an industrial segment in which the group had little prior experience. However, Liberty arguably had much more experience than many private equity companies that buy into assets in which they often have little or no experience.
The smelter operated profitably last year.
Questions still remain, however, over the level of debt and the mechanism used the secure it. In part, the mechanism includes a conventional $350 million loan from a consortium headed by Bank of America.
But in addition, the Financial Times reports, Gupta raised a further higher-risk debt against his stake in the project through BlackRock in January 2019. He secured a $110 million, two-year loan to a holding company above the smelter. The loan included an eye-watering annual interest rate of 14%.
From ‘little known’ to ‘powerhouse’
Impressive as Liberty Group’s rise has been — and let’s face it, we all love a story of entrepreneurial flair — for every success, we have a dozen stories of failure.
Another Financial Times report earlier this year raised questions about GFG’s finances.
In little more than five years, the Financial Times noted, Gupta has gone from a “little known commodities trader” to an “industrial powerhouse.” His industrial empire features $20 billion in annual turnover and 35,000 employees, covering metals, mining, renewable power and more.
Furthermore, his businesses are based across Europe, Australia, and the U.S. Keeping track of such a diverse geographic spread, let alone industrial activities, makes for a challenging management environment.
But it is Liberty’s financial arrangements that have raised the most questions.
Much of its acquisitions are based on often opaque receivables finance structures at high rates of interest.
For example, one of the group’s businesses is InfraBuild, an Australian steelmaker and recycler. Investors in the group are charging the company 12% interest on loans, according to the Financial Times.
A receivables facility three times the size of the €740 million deal price funded Liberty’s purchase of seven European steelworks from ArcelorMittal last year.
The Financial Times reports public filings show this €2.2 billion debt facility could incur up to €660 million of total interest payments. That and other potential costs pose a significant ongoing drain on the group’s profitability. This is particularly relevant as nearly all GFG’s purchases have been for turnaround — that is, previously loss-making projects.
Such rapid growth and such opaque and complex financing arrangements may be less worrisome if supported by transparent financial reporting.
The group claims, however, refers to its status as private enterprise. As such, it argues it is not obliged to reveal granular detail. In short, the complex structure of its intercompany loans and sources of finance are not the market’s business.
But reports of slow payments to suppliers suggest a business in which multiple turnarounds are challenging.
Not just for management — but for finance, too.
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