Thursday 27 February 2020 ★ FINANCIAL TIMES 9

F T B I G R E A D. INDUSTRY

Sanjeev Gupta has built a $20bn business largely on distressed purchases and unconventional funding.

But financial and operational issues have cast doubt over his plans to revitalise faded heavy industries.

By Michael Pooler and Robert Smith

much of the debt from Greensill Capital.

The FT revealed last year that Liberty

House’s biggest deal to date — the 2019

purchase of seven European steelworks

from ArcelorMittal — was funded by a

receivables facility three times the size

ofthe€740mdealprice.

Public filings show that this €2.2bn

debt facility from Greensill could

incur up to €660m of total interest

payments. One adviser on the

transaction expressed disbelief

that GFG and Greensill were able to

wring that much value out of the

plants’invoices.

Opening the books

GFG’s efforts to shift to more conven-

tional funding have faced setbacks, with

the group’s first corporate bond deal

nearlyendingindisasterinSeptember.

Mr Gupta was forced to inject $150m

of his own money to save the debt issu-

ance by InfraBuild, an Australian steel-

maker and recycler. Investors still

charged InfraBuild a 12 per cent interest

ratefollowingalukewarmreception.

To address concerns around GFG’s

opacity, Mr Gupta has vowed to publish

two sets of consolidated accounts for his

steel and aluminium businesses. Until

now, GFG’s industrial empire has been

split across separately audited entities,

many of which are signed off by a small

London-based accountancy firm called

King&King.

GFGsaysitscompaniesarefinancially

independent of each other, which

should in theory insulate any failures.

“These individual companies have their

own treasuries,” said Mr Hambro.

“There is no pooling of funds among

differententities.”

However, a review of public doc-

uments and interviews with

former employees suggest many

GFG entities are deeply enmeshed

with each other, often owing or

lending significant amounts of

moneytosistercompanies.

Restructuring may be required with

possible divestments, say three people

familiar with the assets. Yet Mr Gupta

continues to chase deals and is keen to

step in should a planned Chinese takeo-

verofBritishSteelfallthrough.

“We are working towards further

enhanced transparency and govern-

ance, and intend to publish consoli-

dated accounts for Liberty Steel Group

in 2020,” says a GFG spokesperson.

“However, as a private, family-owned

company, we do not intend to provide

granular details of our finances in

response to every rumour, half-truth or

pieceofspeculation.”

A

s he rubbed shoulders with

an elite club of world lead-

ers, bankers and billion-

aires, Sanjeev Gupta could

have been forgiven for feel-

ingthathehadfinallyarrived.

Making his debut at the World Eco-

nomic Forum in Davos in January, the

metals magnate’s message chimed with

the event’s dominant theme of climate

change. “Most of the world wants to go

to legally-binding carbon neutrality by

2050,” Mr Gupta said in a television

interview at the resort. “Both our steel

and aluminium businesses will be car-

bon-neutralby2030.”

It was a characteristically bold claim

from a man who has sought to join the

ranks of global tycoons with an ostenta-

tious style marked by private jets, tro-

phymansionsandgrandiosepledges.

Through a dazzling run of acquisi-

tions around the world, in little more

than five years the 48-year-old Mr

Guptahasgonefromalittleknowncom-

modities trader to the captain of an

industrial powerhouse with $20bn in

annual turnover and 35,000 employees.

Its interests span metals, mining,

renewablepowerandevenbanking.

Mr Gupta has rescued failed or

unwanted factories stretching from

Scotland to South Australia. But while

the appearance at Davos burnished his

credentials as a successful industrialist,

it masked brewing problems at GFG

Alliance,hisfamily’sbusinessempire.

A string of financial and operational

issues has cast doubt over the business-

man’s grand ambitions to revitalise

faded heavy industries in the developed

world and reduce their carbon footprint

byrunningplantsongreenenergy.

Weeks before his Davos cameo, 355

workers were made redundant at two of

Mr Gupta’s UK steel mills reeling from

an industry downturn. Last year, one of

his biggest factories fell into technical

default on a $350m loan. And the FT

revealed this week that a small UK bank

within GFG Alliance has faced regula-

toryscrutinyoveritslendingpractices.

Interviews with more than a dozen

current or former employees, many of

whom asked not to be identified, plus a

reviewofpublicandprivatedocuments,

reveal a host of difficulties. From

unhappy lenders, delayed supplier pay-

ments and a number of businesses with

accounts in the red, they paint a picture

ofastretchedorganisation.

A loose collection of dozens of Gupta

family entities, GFG Alliance does not

publish consolidated accounts, making

it difficult to assess its overall perform-

anceandfinancialhealth.

Jay Hambro, GFG’s chief investment

officer, acknowledged that some of its

businesses are still being turned round,

but rejected the idea of widespread

issues. “Across GFG Alliance, there are a

broad range of different companies.

Some are making a substantial profit

and some are challenged,” he said in a

Decemberinterview.

However, a lack of financial transpar-

ency, coupled with often unconven-

tional funding methods and Mr Gupta’s

seemingly insatiable appetite for deal-

making, has left some current and

former employees and industry observ-

ers questioning whether GFG is built on

solidfoundations.

Finding the finance

BehindMrGupta’sascentisanapparent

gift for turning rust into gold. Creative

financing has unlocked cash for invest-

ments and day-to-day operations at

companies often in need of over-

haul, while minimising how much

moneyGFGitselfhastocontribute.

Lex Greensill, a 43-year-old bil-

lionairefinancierfromAustralia,has

been the mastermind behind much

of GFG’s complex funding. His financial

services firm Greensill Capital, which

has drawn $1.5bn of investment from

Japanese conglomerate SoftBank’s pow-

erful Vision Fund, has arranged billions

of dollars of working capital finance for

MrGupta’sindustrialbusinesses.

While Greensill Capital has cast itself

as a disruptive start-up “changing

finance to change the world”, it has also

used a distinctly old-world method to

finance GFG: a 93-year-old bank in Ger-

many’sindustrialheartland.

Greensill Bank, a Bremen-based

lender the Australian financier’s firm

tookoverandrenamedin2014,haspro-

vided more than $1bn of funding to

GFG’smetalsplantsbackedbytheircus-

tomer invoices — so-called receivables

finance — according to three people

familiarwiththematter.

But it is Mr Gupta’s funding from

another bank closer to home that has

drawnregulatoryscrutiny:hisown.

The Prudential Regulation Authority,

the UK’s banking watchdog, last year

began a review of lending activities at

Wyelands Bank, a lender to small and

medium-sized manufacturers that Mr

Gupta acquired in 2016. Wyelands says

it operates independently from GFG,

although it has always made clear that

alded Mr Gupta’s arrival as a major

player in manufacturing on the conti-

nent — with a helping hand from Wye-

landsBank.

The deal also represented GFG’s entry

into the world of traditional bank loans.

Until that point, GFG entities had

largely depended on expensive forms of

asset-backed debt, typically favoured

by small businesses without access to

conventionalfunding.

Mr Gupta — who owns 100 per cent of

Liberty House — made use of some of

these techniques on Dunkirk, raising

$34m from Wyelands Bank using high-

interest loans backed by the plant’s

inventory, which were routed through

two intermediary entities. But Liberty

House also graduated to mainstream

finance by convincing a consortium of

blue-chip lenders — led by Bank of

America — to back its purchase of the

smelterwitha$350mloan.

Within months of the deal, the Dun-

kirk smelter had breached certain

terms on the loan. While no scheduled

payments were missed, issues such as

delayed filing of audited accounts and a

requirement for Mr Gupta to inject

more cash into the venture saw the loan

fallintoa“technicaldefault”.

“It was one of the quickest defaults in

history,” says one person aware of the

situation.

Liberty House remains locked in legal

disagreement with the smelter’s former

owner, the mining group Rio Tinto,

which argues it is owed $50m as a final

payment from the sale. Liberty disputes

theclaim.

Theironyisthatwhileadropinglobal

aluminium prices contributed to the

predicament,Dunkirkturnedaprofitin

2019. Guillaume de Goys, the plant’s
      managing director, praised Liberty’s
      investments and the greater autonomy
      it has given management. “For us it has
      adirectandpositiveimpact,”hetoldthe
      FT last year. “Decisions are made on-
      site,muchclosertotheoperations.”

‘Saviour of steel’

The son of a bicycle manufacturer, Mr

Guptabegantradingcommoditieswhile

at Cambridge university, before found-

ing Liberty House in 1992. He took his

firststepintomanufacturingbyreopen-

ingasmallWelshsteelmillin2015.

Astring of takeovers of bankrupt or

struggling companies led to him being

dubbed the UK’s “saviour of steel”.

There followed an international expan-

sion that catapulted Liberty into the

ranks of the top 10 producers of the

metaloutsideofChina.

The operational capability at GFG

Alliance is now being put to the test at

Keystone Consolidated Industries, a US

producer of steel wire and rods pur-

chased by Liberty House at the start of

last year. The business enjoyed a record

financial performance in 2018, but cur-

rent and former employees say a lack of

money has led to late supplier pay-

ments and a shortage of raw materi-

als, leaving the mill occasionally

unabletoproducefull-time.

“We have started to get more

money of late,” said one worker at

the plant. “Our reputation is still not

good with vendors and we are still

late on customers’ orders. It will take

timetopulloutofthis,ifweevencan.”

One haulier said last year they had to

chase invoices for weeks before receiv-

ing a cheque, and even then not for the

full amount owed. “We never had any

trouble with them [Keystone] before.

It’s been going downhill since then [the

takeover].”

Michael Setterdahl, chief executive of

Liberty Steel USA, put the problems

down to a bad market in mid-2019 but

saidthatdemandhadsincerecovered.

“For November and December, we

[were] sold out and the forecast for Jan-

uarylooksverypositive,asdoesthefirst

quarter of next year,” he said late last

year,addingthatthebusinesswas“talk-

ing with all suppliers and making signif-

icantpaymentseveryweek”.

Mr Setterdahl dismissed the idea of a

lack of funds for day-to-day operations:

“Liberty Group has been injecting

equity into the business, so it’s not a

shortageofcash.”

And not all workers at the plant share

the negative assessment. “We’ve

been slow on orders, just like every-

body else in the United States,” says

one. Given that the entire US indus-

try enjoyed an exceptional boost in

2018 following President Donald

Trump’ssteelimporttariffs,theysaid

it was unfair to compare the two time

periods.

While pushing out supplier payments

is not unheard of, the issue has arisen at

Liberty’s steel mills in the UK and Aus-

tralia, according to people familiar with

the matter. “He [Mr Gupta] likes to pay

everything at the last minute,” says one

UKemployee.

GFG says: “We are a group of busi-

nesses heavily investing for growth and

turnround and, while doing so, we seek

to adhere to agreed supplier payment

terms and manage positive relation-

shipswithimportantstakeholders.”

Bills to suppliers and invoices from

customers are crucial to the financial

plumbing of GFG’s empire, backing

MrGupta’sbusinesshasbeenasourceof

client“introductions”.

The FT investigation found that Wye-

lands Bank appeared to skirt a regula-

tory cap on related party lending, which

restricts funding of affiliated companies

and individuals. The lender did this by

routing millions of pounds’ worth of

transactions that financed GFG’s busi-

nesses and assets through a series of

seeminglyindependentintermediaries.

Several of these entities were essen-

tially shell companies and their owners

often had longstanding links to GFG,

with some having worked for Mr Gupta.

In several cases, they received funding

from Wyelands to buy goods such as

steel or aluminium from GFG compa-

nies, or even the acquisition of busi-

nesses.Twelveoftheseapparentlysepa-

rate entities all gave power of attorney

to a senior GFG executive to sign loan

documentationontheirbehalf.

Wyelands Bank said in a statement

that its regulatory business plan

“involves sourcing business through the

GFG Network as the bank builds up its

businessflowfromothersources”.

A spokesperson for GFG said it

“frequently does business with

trusted acquaintances and friends

who go back a long way”. GFG

added that it was “reviewing the

terms of its relationship with Wye-

lands Bank in order to ensure that all

dealings continue to conform to the

highest standards of transparency and

governance”.

Loan problems

Located in northern France’s rust belt,

the Dunkirk aluminium smelter is

Europe’s largest producer of the light-

weight metal. Its $500m buyout in

December 2018 by Liberty House, one

of the main companies within GFG, her-

The workings of Gupta’s empire

Sanjeev Gupta,

the CEO of GFG

Alliance and

owner of Liberty

House and

Wyelands Bank.

GFG’s interests

span steel and

aluminium

production,

hydroelectric

plants and

industrial

finance. Below:

Liberty’s Galati

steel plant in

Romania

FT montage

€2.2bn

Receivables facility that

funded the deal to buy seven

steelworks. The Greensill

finance could incur up to

€660m in interest payments

>$1bn

Funding from Greensill

Bank to GFG’s metals

plants, backed by

their customer

invoices

$350m

Loan from a Bank of America-

led consortium that Liberty

House received to back its

purchase of the Dunkirk

smelter

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