Tata Steel Rises 4%, Group Stocks Crash Up To 9% After Board Okays Mega Merger Scheme

Tata Steel Merger: Tata Steel shares rose 4 per cent to Rs 107.90 on the BSE in Friday’s intra-day trade after the company’s board approved the amalgamation of seven group companies with itself. However, TRF, Tinplate, Tata Steel Long Products, and Tata Metaliks shares fell in Friday’s trade. Tata Steel Long Products dipped 9 per cent to Rs 680, followed by Tinplate Company of India down 6 per cent at Rs 317, TRF (down 5 per cent at Rs 335.65) and Tata Metaliks (down 2 per cent at Rs 777). In comparison, the S&P BSE Sensex was down 0.44 per cent at 58,861 at 09:28 am.

The company has said its board of directors has approved the amalgamation of all metal companies of the Tata group into it. There are seven metal companies that will be merged with Tata Steel — Tata Steel Long Products, The Tinplate Company of India, Tata Metaliks, TRF, The Indian Steel & Wire Products, Tata Steel Mining, and S&T Mining Company.

It added that each merger scheme was reviewed and recommended to the board by the committee of independent directors and the audit committee of the company.

The amalgamation will consolidate the business of group companies and the company which will result in focused growth, operational efficiencies, and business synergies. In addition, the resulting corporate holding structure will bring enhanced agility to the business ecosystem of the merged entity, Tata Steel said in an exchange filing. These companies believe that the resources of the merged entity can be pooled to unlock the opportunity for creating shareholder value.

The proposed scheme of amalgamation has been undertaken to realise better synergies of business of the entities involved in the scheme. The proposed scheme would lead to operational integration and better facility utilisation, rationalisation of logistics costs, operationalised efficiency, simplified structure and management efficiency, etc.

Swap ratios for the proposed amalgamation:

Tata Metaliks: Tata Steel to give 79 shares for every 10 shares of Tata Metaliks (Share swap at 2 per cent premium. In favor of Tata Metaliks)

Tinplate: Tata Steel to give 33 shares for every 10 shares of Tinplate (Share swap at 1 per cent premium. In favor of Tinplate)

Tata Steel Long Products: Tata Steel to give 67 shares for every 10 shares of Tata Steel Long Products (Share swap at 7.8 percent discount. In favor of Tata Steel)

TRF: Tata Steel to give 17 shares for every 10 shares of TRF (Share swap at 53 per cent discount. In favor of Tata Steel)

What Should Investors Do Now?

Analysts at Edelweiss Securities perceive the proposed amalgamation scheme as in line with management’s strategic intent of simplifying the structure and unlocking value. “In our view, the benefits of lower iron ore royalty cost are likely to be immediate, but the more strategic ones such as portfolio optimisation, sharpened focus on long products, and cross-functional benefits are likely to accrue over a period of time,” they said.

In terms of the stock reaction, for Tata Steel, the brokerage sees the benefits of incremental EBITDA from subsidiaries to be offset by dilution in shareholding. The stock prices of listed subsidiaries are, however, likely to recalibrate to the one suggested by the swap ratio. Edelweiss maintains its ‘hold’ rating on Tata Steel stock with an unchanged target price of Rs 98.5 per share.

Ravi Singh VP, Head – Research, Share India, said Tata Steel stock is also reflecting the investors’ confidence in the counter with a surge in the volumes which may push the stock to Rs 110 levels in the short term and Rs 115 in a long-term perspective.

The proposed scheme would synergise – operational integration and better facility utilisation; improve customer satisfaction and services; efficiency in working capital and cash flow management; faster execution of projects in the pipeline; rationalization of logistics costs, said Tata Steel in a regulatory filing. Analysts at Anand Rathi remain positive on Tata Steel stock after the event. The brokerage firm maintained its ‘buy’ rating on the stocks with a target price of Rs 146 apiece.

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