Japan’s second largest steel maker JFE is buying around 14.99% stake in JSW Steel for about $1.02 billion (Rs 4,800 crore) in what is pegged as one of the biggest foreign direct investment deal in metal and mining space till date.

The transaction will be through a preferential allotment which could take the form of either equity issue or convertible debentures. The deal will value the third largest Indian steel maker at $6.8 billion (Rs 32,026 crore) or almost 50% more than its existing market cap of Rs 21,735 crore.

The pricing of the transaction is contingent on scrip movement of JSW. If the JSW scrip reaches or exceeds Rs 1,365 for a certain period before August 31, 2010, JFE will be allotted 3.2 crore shares at Rs 1,500 per share.

Otherwise JFE will subscribe to one convertible debenture with the face value of Rs 4,800 crore. This debenture will be convertible into shares within 18 months at the same price of Rs 1,500 per share if the JSW scrip reaches/exceeds Rs 1,365 during the tenure of the debenture. If the share prices does not meet the above criteria, JFE will subscribe to shares at Rs 1,331 a piece.

In either case, JSW is selling a stake that is marginally less than 15%, the trigger point for a mandatory open offer as per Indian takeover norms of a listed company. This will allow JSW Steel to bring in a strategic partner without stressing the foreign firm to go through an open offer.

JFE also gets to nominate a director on the board of JSW Steel. In addition it has anti dilutive (stake) rights.

Sajjan Jindal-led JSW had recently allotted warrants to promoters that gave the Jindals 1.75 crore warrants convertible at Rs 1,210 per share. The promoters holding as of June end was 44.9%. After conversion of warrants into equity and estimated equity dilution due to allotment to JFE, promoter’s holding will shrink marginally to around 43%.

As per its disclosure to the stock exchanges, JSW plans to use the funds raised for debt reduction / to meet the capital expenditure / long term working capital requirements and general corporate purposes. It has also entered into a foreign collaboration agreement, technical assistance agreements for automotive steel, general technical assistance agreements for plant performance improvement and substrate supply agreement with JFE.

The transaction is part of a strategic partnership announced last November. The world’s sixth largest and Japan’s second biggest steel-maker JFE along with JSW Steel had announced that they have struck a partnership pact to co-operate in developing automotive grade of steel.

This would mark yet another global partnership between and Indian and global steelmaker. While Tata Steel had acquired UK’s Corus, Arcelor Mittal had struck a partnership with Uttam Galva.

JFE is looking to build a supply base for Japanese carmakers such as Toyota and Nissan who are planning big-time manufacturing in India, one of the world's fastest growing car markets. It also marks a further expansion for JFE in the two fastest growing economies in the world.

It had recently agreed to buy 24% stake in a steel-pipe firm in China called Panchen Yihong Pipe Co. Panchen Yihong Pipe, which produces seamless pipes used in oil production, plans to increase its annual capacity to 330,000 million metric tons from 230,000 tons. PanGang Group Chengdu Steel will have the majority 51% equity stake in the venture with Marubeni-Itochu Steel owning the remaining 25% in the venture.

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