Fear of winner’s curse pulls down Tata Steel shares by 6% TATAS EXPECT BHUSHAN STEEL SALE THIS WEEK
Shares of Tata Steel fell by 6 per cent to ~648 on Monday — losing ~45 billion of market value — as investors are worried about the massive premium paid by the company for Bhushan Steel in comparison to its rival JSW Steel.
Its bid for Bhushan Steel is pegged at over ~400 billion, which includes ~352 billion of upfront payment to financial creditors and another ~12 billion to operational ones. Tata Steel also sweetened the deal with 12.5 per cent equity of Bhushan Steel to the lenders. JSW offered only ~280 billion of payment to banks.
Tata Steel is also leading the race for Bhushan Power & Steel and its offer is pegged at ~170 billion, with another ~75 billion as equity infusion.
But the investors do not want a re-run of the Corus Steel acquisition, which resulted in the company losing billions of dollars and finally led to its merger with ThyssenKrupp. “The additional acquisition will increase the debt burden of Tata Steel India, which is not a good sign,” said an analyst with a leading brokerage.
Shares of Bhushan Steel, however, went up by 20 per cent to ~53.80, as investors expected a turnaround under the Tata management.
Some analysts, however, said the threat of winner’s curse for Tata Steel was over-rated. “At first glance, both the acquisitions look expensive with an enterprise value per tonne of $1,125-1,225 — higher than the Kalinganagar PhaseII expansion of $750 a tonne and the industry benchmark of $1,000 a tonne for an integrated plant up to HR (hot rolled) coil stage. But we perceive longterm potential upsides from Ebitda (earnings before interest, tax, depreciation and amortisation) improvement — from the current ~7,800 a tonne at 58-60 per cent utilisation to ~11,000 a tonne via enhanced capacity utilisation; efficient raw material sourcing and operating synergies; market leadership in the automotive steel segment; and possibility of further brownfield expansion at Bhushan Steel,” analysts with Edelweiss Financial said.
Sources said maybe the market overreacted because Bhushan Steel had a liquid steel capacity of 5.6 million tonnes (mt) and finished steel capacity of 5 mt. But without much investment, sources indicated that the finished steel capacity could be ramped up to 8 mt. But beyond 8 mt, the company would need more land. Tata Steel will also benefit from Bhushan Power & Steel, which has a 2.5 mt HR capacity and 1.3 mt cold-rolled capacity. The steel-making capacity can be ramped up to 3.5 mt at a nominal investment. FEB 16 FEB 17 FEB 16 FEB 17 Tata Steel expects the acquisition of Bhushan Steel and Bhushan Power & Steel will provide synergy to its operations in eastern India, where the company has two manufacturing units, even as it awaits a response from the bankers on its bids. The firm has emerged as the highest bidder for Bhushan Steel, for which it is believed to have offered ~360 billion. Bhushan Steel was sent for debt resolution by its lenders after the company failed to repay its dues worth ~560 billion under the Insolvency and Bankruptcy Code, 2016.
“We are yet to hear from the bankers on bids for Bhushan Steel...We are always in the fray for stressed assets in eastern India,” Tata Steel Managing Director T V Narendran said on Monday. The Bhushan Steel bids are likely to be finalised this week, he added.
Bhushan Steel is one of the largest secondary steel-producing companies with an annual production capacity of 5.6 million tonnes (mt). It has the country’s largest cold-rolled steel plant with an independent line for manufacturing cold-rolled coil and sheet up to a width of 1,700 mm. The secondary steel sector accounts for around 57 per cent of India’s production. This sector uses the production techniques that uses the steel scrap or the sponge iron. If Tata Steel is able to acquire Bhushan Steel, which has a plant in Odisha, it will add a capacity of 5.6 mt.
Through this acquisition, Tata Steel can feed its plants in Kalinganagar and Jamshedpur. It also has mines in the east and can save on logistics cost. Tata Steel has a capacity of 12.7 mt — 9.7 mt in Jamshedpur and 3 mt in Kalinganagar. It also has the environmental clearance for adding another 1 mt in Jamshedpur. Recently, the Tata Steel board cleared an additional capacity of 5 mt in Kalinganagar in its second phase of expansion. This will be executed in 48 months. With an addition of 5.6 mt through the Bhushan Steel acquisition, its capacity will be 24.3 mt.
Another company in the fray for Bhushan Steel is JSW Steel, which quoted ~100 billion for the takeover. Both the Bhushan companies were on the Reserve Bank of India’s first list of 12 companies that failed to repay bank loans.