Baring Private Equity Asia-backed Bhushan Power & Steel has acquired majority stake in small-sized and loss-making sponge iron firm Nova Iron & Steel through a mix of indirect stake acquisition and stock market purchase from the promoter Gambhir family and other investors.

Sanjay Singal-led privately held firm Bhushan Power & Steel now owns 50.6 per cent in the public-listed company, it has disclosed to the stock exchange on Tuesday. However, it will have to come out with an open offer for at least another 20 per cent stake in Nova Iron.

Nova Iron & Steel scrip hit the upper trading circuit with 4.97 per cent increase to close at Rs 14.79 on Tuesday, valuing the firm at Rs 222.7 crore ($49.7 million) at the BSE.

Bulk of the stake was acquired from Nova Iron promoters, the Gambhir family. And this makes it a friendly takeover by Bhushan Power. Bhushan Power had acquired 22.8 per cent through open market purchases over the past one week and informed the bourses that it acquired a further 27.57 per cent stake through an ‘indirect purchase’ from unnamed shareholders.

Although the price at which it acquired the shares had not been disclosed, as per the average price over the past few days, it could have shelled out close to Rs 52 crore to buy the indirect stake. This takes the company’s overall investment in Nova Iron to a little over Rs 95 crore or $21 million, according to VCCircle estimates.

An open offer for another 20 per cent will cost Bhushan Power another Rs 45 crore ($10 million).

The Gambhir family held 58.2 per cent stake (a quarter of this was pledged) in Nova as of March 31, 2011. With the two rounds of stake sale in the market, their holding is estimated to have come down to around 39 per cent. If they were the only sellers of the large chunk of shares purchased by Bhushan Power in an indirect purchase, their holding is now down to around 11.4 per cent.

So, What’s The Endgame?

For Sanjay Singal, who split from his father and brother who control the public-listed firm Bhushan Steel & Power, this comes as an inorganic expansion after a failed bid in a three-way takeover battle for Orissa Sponge & Iron. Besides Singal, other suitors for Orissa Sponge included Monnet Group and Bhushan Steel & Power.

Nova, which posted revenue of Rs 144 crore with net loss of Rs 4.23 crore for the year ended March, 2010, has seen a significant slide in business with revenues of less than Rs 3 crore in three straight quarters – ending with the three months ended December, 2010. It is yet to disclose numbers for the quarter ended March, 2011, or for the full financial year. This made it a ripe acquisition target.

Singal appears to be betting on reviving Nova’s business. And he certainly has the means to do so. Bhushan Power & Steel had revenues of Rs 4,008 crore ($890 million), with earnings of Rs 255 crore for the year ended March, 2010. It had cash and bank balances of around $100 million for FY10.

The next logical question is – what is a large, privately held, PE-backed manufacturing firm doing with acquiring a majority stake in a mini-sized sponge iron maker? If the stock price movement is any indication, investors can be smelling a reverse merger!

See our earlier reports:

Bhushan Power Raises Holding in Nova Iron; To Trigger Open Offer

Sanjay Singal Takes A Bite Of Nova Iron; Will He Go All The Way?

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