Baring Private Equity Asia-backed Bhushan Power & Steel has made an open offer to acquire a further 20 per cent stake in small-sized and loss-making sponge iron firm Nova Iron & Steel that will cost it Rs 42.16 crore ($9.4 million).

Sanjay Singal-led privately held firm Bhushan Power & Steel has already acquired 50.6 per cent of Nova Iron through a mix of indirect stake acquisition and stock market purchase from the promoter Gambhir family and other investors. It has also entered into a separate agreement to acquire another 11.3 per cent that will push its total holding to 61.94 per cent before the open offer.

According to VCCircle estimates, the deal has already cost Bhushan Power Rs 122.4 crore or $27 million (including the shares to be acquired under the agreement).

Nova Iron & Steel scrip was down 1 per cent at Rs 14.31 a share at BSE in early morning trade on Thursday. At this price, the company is valued at Rs 221 crore ($49 million).

Bulk of the stake was acquired from Nova Iron promoters, the Gambhir family. And this makes it a friendly takeover by Bhushan Power.

The Gambhir family held 58.2 per cent stake (a quarter of this was pledged) in Nova as of March 31, 2011. With various rounds of share sale, they are expected to exit almost completely from Nova Iron.

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.

Nova Iron has 1.5 lakh tonnes of sponge iron capacity at Chhattisgarh. The company had turned sick and went through a restructuring a few years ago. However, it couldn’t sustain the business and last December, filed with Board of Industrial & Financial Reconstruction.

Singal is 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 FY2010.

The next logical question is – what will a large, privately held, PE-backed manufacturing firm do with a majority stake in a mini-sized sponge iron maker? Could a reverse merger be in the offing?

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