Liberty Steel pushes for the big league with Thyssenkrupp offer
Sanjeev Gupta’s GFG Alliance and, in particular, its steel and aluminum subsidiary Liberty Steel, is rarely out of the news, it seems.
The firm’s insatiable appetite for bankrupt or struggling metals assets has the market split. One the one hand, boosters are cheering its entrepreneurial spirit. On the other, naysayers are questioning the opaque funding structure and apparently high levels of expensive debt underpinning what they see as a potential house of cards.
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Liberty Steel eyes Thyssenkrupp’s steel business
We are more interested in the implications for the steel market.
Liberty’s latest foray into acquisitions would create a potentially disruptive behemoth in a crowded European market. That market is facing intense foreign competition and declining demand as a result of a pandemic-induced slowdown in manufacturing.
That Thyssenkrupp is desperate to sell its loss-making steel business is not new news.
The steel division has been a major drag on the group. According to the Financial Times, the group is likely lose €1 billion ($855 million) this year.
This year, Thyssenkrupp sold its elevator business for $17 billion in an effort to shore up its finances. The firm has been in talks with other steelmakers, including Sweden’s SSAB and India’s Tata, the Financial Times reported.
So far, however, Thyssenkrupp hasn’t found a buyer that would pass competitions scrutiny.
Which raises the question: will Liberty?
Liberty runs plants and mines across North America, Australia, and India. The firm has global revenues of $15 billion and a workforce of 30,000.
Thyssenkrupp’s beleaguered Steel Europe unit generates sales of approximately €9 billion with 27,000 employees. Together, the firms would become the second-largest steelmaker in Europe, behind only ArcelorMittal.
Logic says in a market suffering poor capacity utilization, rationalization would be one recipe for turning the group around. However, unions and state governments are likely to fiercely resist widespread redundancies.
The German union IG Metall has held demonstrations to oppose job losses and demand government bailouts. Brussels previously denied a Thyssen-Tata merger over fears it would reduce competition. As such, it remains to be seen how it will view a Liberty-Thyssen takeover.
Nor is it clear how Liberty would fund the acquisition, despite saying it would use its own cash. History shows Gupta’s GFG Alliance uses forms of trade finance to raise relatively high-interest debt, facilitated by an arrangement with Greensill Capital backed by Softbank.
Interest rates on such debt are said to be high and yet, so far, GFG has purchased struggling or bankrupt assets. While no consolidated accounts are produced, it appears to be running most of them at a profit (at least pre-COVID).
Thyssen would cost anything between 1 billion and 2 billion Euros (depending on whose valuation you accept). In the past, Liberty has aggressively sought state funds for investment post-acquisition. While the position of the German state and federal governments is unclear, if it avoids widespread redundancies there may be taxpayer money available.
Gupta has tried to assure workers that he would make Germany the center of his merged steel group.
So what does that mean for his British production assets?
European steel challenges
Europe’s steel industry is facing multiple challenges. While not alone, the region has both the advantage and disadvantage of a mature, sophisticated regional market.
It has an advantage in that it’s characterized by demand for sophisticated, high-technology steels for aerospace, automotive, medical and defense applications.
Meanwhile, its disadvantages are its environmental standards and employment costs are some of the highest in the world, adding substantial costs to producers in the region.
Europe’s steel industry is following multiple paths to decarburizing and meeting increasingly more stringent standards. Some producers are flirting with hydrogen as a fuel source. Others, like Liberty, are looking to replace blast furnaces with scrap-based electric arc furnaces and renewable energy sources.
Arguably, Gupta has been in the vanguard of promoting the switch to EAF steel production. It is a move that is relatively well received in the halls of power where decisions are made about state support.
While GFG does not have the established presence of an SSAB or Tata, it has proved a scrappy competitor and may yet win the day in acquiring Thyssenkrupp’s steel division.
Whether it makes a profit is another matter.
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“While no consolidated accounts are produced, it appears to be running most of them at a profit (at least pre-COVID).”
I wonder how good the evidence is. As a vertically integrated business with its own in-house bank (Wyelands) and friendly external financiers, that appear to lean on suppliers and customers to fund the working capital, how can we have confidence Liberty’s steel businesses are profitable?
And why the aversion to a full consolidation? If for tax reasons then that rather undermines Gupta’s green, socially conscious credentials.
I couldn’t agree more MR6, to some extent we are giving Liberty the benefit of the doubt but we are not alone in being extremely circumspect about the group’s finances. I think if they were making significant loses across a number of entities you would not see the continued expansion but there is no doubt their financing approach is unconventional, inconsistent with the best accounting transparency standards and only adds fuel to worries about the sustainability of the model.