How Sanjeev Gupta built his empire
It might be almost summer, but a patchwork blanket of snow still covers the tops of Ben Nevis and the neighbouring peaks that huddle around Fort William, the second-largest town in the Scottish Highlands.
The remote beauty of the mountains and Loch Linnhe, which
runs like a dark carpet out to sea from the foot of the hills, makes this the
last place you would expect to find a big industrial plant.
There is one, however - the last of its kind in the UK. The
Lochaber smelter churns out 48,000 tonnes of aluminium a year, its turbines fed
by water brought from the lochs above, in a tunnel that runs underground in a
12-mile curve around Ben Nevis itself.
Built in the 1930s, it was a prodigious feat of engineering.
In the five years since he bought it, the owner of the smelter and the
surrounding countryside, the metals tycoon Sanjeev Gupta, has managed a similar
feat of engineering, this time financial.
He has raised more than £600m from a facility faced with
closure, thanks in large part to financial support provided by the Scottish
government. A spokesman for Mr Gupta wouldn't comment on what the money has
been used for.
Plans for a big expansion at Fort William have so far come
to nothing.
How Mr Gupta did it - the clever winnowing of value from an
unattractive group of assets and the canny harvesting of financial support from
politicians eager to maintain employment - follows a model he has used in
building a business empire that now spans the world.
He and his family have bought steelworks, mines, power
stations and smelters from Australia to the Czech Republic. Most faced an
uncertain future and possible closure before his arrival.
Politicians have hailed him as a saviour, and he has made a
popular and timely case for investment in more environmentally-friendly ways of
making steel and aluminium.
Now he faces his own fight for survival. The money that
fuelled his meteoric rise came from Greensill Capital, a supply-chain finance
company that collapsed into administration in March. Mr Gupta is now battling
to find new sources of finance, with some of his companies facing winding-up
petitions from creditors.
Looming over all is a Serious Fraud Office (SFO) probe of
his business empire, GFG Alliance, which will investigate alleged fraud,
fraudulent trading and money laundering, with specific reference to the
relationship with Greensill. GFG has said it will fully co-operate with the investigation.
In Scotland, a political backlash to the support granted by
ministers is growing. If Mr Gupta fails in his refinancing attempt and his
empire crumbles, there is the possibility of a hefty bill landing at the
government's feet.
Scotland was a world pioneer in making aluminium using
hydroelectric power, with the first British Aluminium Company smelters
commissioned in the final years of Queen Victoria's reign. The Fort William
plant opened in 1929, and it is the last working aluminium smelter in the UK.
The smelter passed through several sets of owners until it
was acquired by Rio Tinto, the mining giant, in 2007. Less than a decade later,
Rio Tinto decided to get out.
It put the plant, the hydroelectric schemes and the
associated land - a giant 114,000-acre estate, one of the biggest in Scotland -
up for sale.
It was far from certain that the smelter would continue
operating. It is tiny by world standards, and relies on imported bauxite - the
raw ore from which aluminium is smelted - rather than having its own nearby
source.
"There is only one smelter operating in the world which
is smaller that I know of - one in Cameroon," Ami Shivkar, an aluminium
specialist at the consultancy Wood Mackenzie tells the BBC.
"Lochaber makes nearly 50,000 tonnes a year - but many
of competitors are making hundreds of thousands of tonnes. It is a drop in the
ocean."
Many bidders were interested in the hydroelectric plants,
few in the smelter. Brian King, who ran the plant for Rio Tinto and now does
the same job as chairman of Alvance UK, the aluminium division of GFG Alliance,
was intimately involved with the sale.
"There were only two bidders who had any real interest
in the smelting operations. One of those was purely speculative, the other was
GFG," says Mr Shivkar.
The Scottish government already had experience of dealing
with Mr Gupta, having provided loans to help his purchase of two threatened
steel plants, at Dalzell and Clydebridge.
In 2016, he emerged as the victor, paying Rio Tinto £330m.
Almost immediately, work began on a financial restructuring
to drive some value from the newly-acquired assets. Greensill Capital was
drafted in to issue bonds - essentially loans - to City investors, which would
be paid off by a slice of the future income from a second hydropower plant at
Kinlochleven, which came with the estate.
The bonds were issued via a legal entity called Wickham,
according to marketing documents seen by the BBC, and it is understood £229m
was raised, most of which went straight to Rio Tinto as part of the purchase
price.
Another, more complicated bond transaction - again arranged
by Greensill, with the assistance of the Wall Street bank Morgan Stanley -
required the explicit support of the Scottish government.
The marketing documents for Project Boots, also seen by the
BBC, outline a convoluted structure. Gupta companies make an
"irrevocable" commitment to pay investors in the bond issue a
quarterly return.
That commitment is guaranteed by the Scottish government,
which in return receives a fee and security over Gupta assets, chiefly the
companies that own the hydroelectric power assets. The quarterly payments will
continue, the documents make clear, even if the power station breaks down, or
the smelter can't afford them.
Government support for a commercial bond issue is unusual -
and the documents tell prospective investors that this is a "rare
opportunity to invest in [sic] explicit and irrevocable Scottish government
guaranteed fixed income asset".
"I have never seen a transaction like this," says
Prof Florin Vasvari, chair of the accounting faculty at London Business School.
"Bond issues are common, but normally there are just two parties - here
there are several individual companies in the structure, and a sovereign
guarantee.
"I am sure it would have been sought after because a
guarantee like that is extremely rare."
Government support for private enterprise can fall foul of
state aid rules, but the Lochaber deal was approved by ministers after an
investigation by the accountancy firm EY judged that it met value for money and
state aid tests.
Its report - Project Golf - has been made public, but nearly
all of it is blacked out, on grounds of commercial sensitivity. The amount
raised in the bond issue has not been publicly confirmed, but the Project Golf
reports put its value at £259m.
That was not, though, the end of the fundraising. Last year,
the power plant at Kinlochleven was sold to Equitix, an infrastructure
investor, for what City sources confirm was about £150m.
Simec, the arm of the GFG Alliance that deals with power
projects, also has another project on the go, with planning permission sought
for a large wind farm at Glenshero in Inverness.
Local environmental groups, like the John Muir Trust, which
looks after wild areas in Scotland including Ben Nevis, are staunchly opposed
to the wind farm, saying its construction and scale would damage a precious
landscape.
The plan has been rejected by Highland Council, and its fate
will now be decided by the Scottish government.
There is widespread political support for the Scottish
government's provision of financial assistance. Murdo Fraser, the Conservative
MSP who was until recently shadow finance secretary, sat on the committee that
approved it.
"There was a real concern that the smelter might close,
so I understand the government going to lengths to secure its future. It is in
an economically sensitive part of the country," he says.
The question now, says Mr Fraser, was whether Mr Gupta had
made good on promises made in return for the financial support.
"He promised to make a new aluminium wheel factory that
did not materialise, there were promises made about putting land into community
ownership, and they did not materialise.
"And there are questions marks over whether the
Scottish government was sufficiently cautious with taxpayer funds, given GFG
was able to raise so much extra cash."
The Scottish government said in a statement that it had
intervened to save a facility of "strategic importance" and that the
same support had been offered to "any bidder with plans for long term
industrial operations of the Lochaber businesses".
There had been no call on the guarantee to date, it said,
and ministers had taken security, allowing them to claim certain assets if the
GFG companies went bust.
GFG said the wheel plant scheme had to be abandoned because
of the downturn in UK car manufacturing.
"If we had built it, it would now be standing
idle," says Mr King, who stressed that GFG had kept the plant running for
a number of years when aluminium prices were low and it was loss-making.
GFG is now working on plans for a plant to produce aluminium
billet, shaped tubes and squares of metal that are used in extrusion
manufacturing and command a higher price. It will cost about £90m and will
employ about 60 more staff.
There is a wider unhappiness in Fort William with how Mr
Gupta has managed the giant tracts of land acquired with the smelter.
The undertaking he gave to the Scottish government at the
time of the deal - parts of which have again been seen by the BBC - made clear
that he would hand back land to the community.
"We appreciate that community ownership is at the heart
of Scottish government's community empowerment agenda," the document said.
It added that Mr Gupta undertook to work with local groups to "to enter
into community land transactions in relation to significant portions
thereof".
John Hutchison, chairman of the East Lochaber and Laggan
Community Trust, which is named in the undertaking, says no real attempt had
been made to meet the commitment: "Five years on, here we are. We are
still waiting."
GFG rejects the criticism, saying it has given over assets
to local groups and works with charities.
"The East Lochaber and Laggan Community Trust have not
presented us with a proposal we could consider," Julia Stoddart, chief operating
officer of Jahama Highland Estates, the GFG company that manages the land,
tells the BBC.
The future of the smelter - and the other assets that go
with it - are now inextricably linked to the wider fate of Mr Gupta's empire.
His negotiations to find a new investor have been complicated by the SFO
investigation.
White Oak Global Advisors, a Californian investment fund,
has agreed to put some money into his Australian steelmaking operations, but
similar talks for White Oak to invest in the UK have stalled.
City sources say that while many hedge funds and rivals are
interested in buying assets or lending money, the situation is complicated by
the outstanding loans to Greensill and its creditors, notably the Swiss bank
Credit Suisse, which has already issued winding-up notices against two GFG
companies.
Mr Gupta, has, however, been lucky in one respect - iron and
aluminium prices are at a ten-year high, meaning most of his plants, including
Fort William, will be making money.
The question now is whether he can find a way to keep his
creditors - and the investigators - at bay.
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