Tata Steel announced the amalgamation of seven companies into itself earlier today.. Of the seven, four companies, Tata Steel Long Products (TSLP), Tinplate Company of India (TCIL), Tata Metaliks (TML) and TRF, are listed entities. Three, including Indian Steel & Wire Products (ISWP), Tata Steel Mining and S&T Mining, are unlisted companies.

The exercise will include share swap of Tata Steel shares for the target companies’ public shareholding in the case of listed companies, and a minor ₹12 crore payout to one minority shareholder in ISWP, as the other unlisted companies are fully held by TSL.

Operational synergies

Low hanging fruit from the amalgamation of the seven companies into the parent company, is a reduction in redundancies in the management structure. Further, synergies in management can be realised by pooling resources under the various heads -- procurement, production planning, sales/ marketing and distribution activities, working capital and finance . Sharing best practices would also improve efficiency of operations

Tata Steel, the standalone entity (prior to the amalgamation), was sourcing iron ore and coal from Tata Steel Mining. Avoidance of any royalties for such sourcing can also be a significant cost advantage for the independent entities, but may be a net zero from a consolidated position.

One leg of growth for Tata Steel in the medium-term is based on increased contribution from value-added products. With the addition of TSLP (value-added long products) and even TML and TCIL into TSL, the cross-functional sharing of technical know-how on improving the value-added portfolio contribution, can be a longer term positive for the amalgamated entity.

The other leg of growth for the longer term is based on increasing the consolidated capacity from 30 MT to 40 MT by 2030. A large part of the plan relies on expanding Neelachal Ispat (NINL), whose acquistion by TSLP (which is already a consolidated subsidiary of TSL) was completed in July 2022. The existing 1 MT capacity of NINL is expected to be fired in 2HFY23 and TSL sees an additional 4 MT capacity addition in the acquired company. By amalgamating TSLP, TSL will have better control on capacity addition and execution of the key plant.

Shareholder implications

Owing to the synergies, Tata Steel gained 1.5 per cent today, compared to its peers declining by an average 0.75 per cent (SAIL, JSW Steel and Jindal Steel). This is despite the 2.25 per cent share dilution on account of the share swap ratio announced. According to the share swap ratio, 10 shares each of the listed companies TSLP (Long Products), TCIL (Tinplate), TML (Metaliks) and TRF will be exchanged for 67/33/79/17 shares of TSL, respectively.  Based on Thursday’s closing prices, this represents a 7 and 53 per cent lower value for shareholders of TSLP and TRF, while for TCIL (+1 per cent) and TML (+2 per cent) shareholders, it is fairly valued. In line with the same, TSLP has declined by 9 per cent, TRF is locked in the lower circuit range of 5 per cent. TCIL and TML have also declined by 6 and 3 per cent, respectively, from a flat opening in the morning.

TRF is into material handling turnkey projects of the infrastructure sector (revenues of ₹127 crore in FY22) and it has a higher public shareholding at 65.88 per cent. This further complicates the share swap offer ratio, which is at a steep discount of 53 per cent. TRF shares have been range-bound between ₹122-165 in the last one year, before rallying 120 per cent in the last one month. It will be interesting to see how the TRF board balances future business prospects with the parent/ promoter company, while accepting a steep discount for the minority shareholders.

Shareholders of TSLP - which has been burdened by debt from the NINL acquisition and is yet to gain from improving operations of the same - must look at the share swap in the light of the stock having declined by 14 per cent in the year prior to the day. But the Tata Steel share price has also faced a similar decline on account of similar issues as the parent company, making for an exchange of two stocks that have already been beaten down.

Overall, the acquisition of mostly consolidated subsidiaries (except for TRF) should improve management and operation efficiencies across the structure, and be value accretive for shareholders of TSL in the long run.

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