The board of Tata Steel approved the amalgamation of Tata Steel Long Products Ltd (TSL), Tinplate Co. of India Ltd, Tata Metaliks Ltd, TRF Ltd, The Indian Steel & Wire Products Ltd, Tata Steel Mining Ltd and S&T Mining Co. Ltd.
Analysts said the amalgamation simplifies the corporate structure and may bring synergy benefits and save costs, besides potential earnings accretion.
Tata Steel rose as much as 4.1% on the stock exchanges on Friday but pared much of the gains as the benchmark Sensex index plunged over 1.73%. However, it still managed to close with gains of 0.55%.
Tata Steel will give 79 shares for every 10 shares held by Tata Metaliks shareholders and 33 shares for every 10 shares held by Tinplate shareowners. The share swap at a 2% premium and 1% premium, respectively, appear in favour of Tata Metaliks and Tinplate stockholders, said analysts at Anand Rathi Equity Research.
However, the share swap ratio in Tata Steel Long Products, where Tata Steel is to give 67 shares for every 10 shares of Tata Steel Long Products (share swap at 7.8% discount), is in favour of Tata Steel shareholders, analysts said. TRF, where Tata Steel will give 17 shares for every 10 shares of TRF (share swap at 53% discount), is also in favour of Tata Steel.
Tata Steel will pay ₹426 per share to the shareholders of Indian Steel & Wire Products Ltd. Tata Steel Mining Ltd and S&T Mining Co. Ltd are wholly owned units of Tata Steel.
Tata Steel has cited operational integration and better facility utilization among the key benefits that can drive synergy benefits for the company with the amalgamation. Resources of merged entities can be pooled while the marketing and distribution networks of companies collaborate.
The consolidation may also lead to better raw material security and rationalization of logistics costs. In addition, the royalty paid on iron ore sourcing by the companies will also reduce significantly post amalgamation, analysts said.
The company also pointed to the benefits that will accrue from efficiency in working capital and cash flow management, though it did not quantify or provide any specific guidance on potential synergies.
Jatin Damania, vice-president, fundamental research, Kotak Securities Ltd, said, “We estimate ₹750 crore-800 crore of annual savings, equity dilution of 2.2% and potential earnings per share accretion of 1.5-2%."
Damania said that the merger is a positive step as it will simplify the corporate structure, plug leakage of additional royalty payments on inter-company iron ore transfers, reduce corporate overheads, enable various businesses with the higher financial flexibility to progress on growth projects and bring in further operational, procurement and tax synergies.
Analysts at another domestic broking said the merger is the right step for Tata Steel Ltd. It will help Tata Steel drive operational and structural synergies across its whole steel value chain, including the forward integration into DI pipe, tinplate, alloy steel and also heavily reduce royalties paid by its subsidiaries on iron ore sourcing.
Analysts also added that some of the subsidiaries having net cash balances and strong cash flow generation would be a favourable value-added business addition to Tata Steel’s portfolio.