Event update: Tata Steel (Outperformer) - Europe JV deal called off: set back but not a cause of worry
Event
Tata Steel (TATA IN) informs that the proposed JV of their European steel business with Thyssenkrupp (TKA GR) will not go ahead due to the European commission (EC)’s continuing concerns.
Details
TATA and TKA have offered to divest few of their assets to address EC’s concerns on competitive intensity in Europe. However, the market survey did not resolve the EC's concerns and it asked for further divestment of some of the key assets of the companies. It seems that the roadblock was due to higher market share of auto steel for the combined entity.
TATA informs that further assets divestment would adversely affect the synergies of the merger to such an extent that the economic logic of the JV would no longer be valid. As a result, merger is being called off.
Impact
TATA would have transferred ~US$ 3 bn debt to a proposed JV, which is not a case now. Besides, no expected synergy benefits to accrue.
However, we believe that Tata Steel Europe (TSE) can meet its interest and capex requirement from internal cash generation. At 10mt volume, TSE has to generate EBITDA/t of US$43-51 in FY20 to be cash break-even, which is doable. We have assumed TSE to generate EBITDA/t of US$58 in FY20.
Outlook and view: Reiterate Outperformer with revised TP of Rs635
We view the call off of a European JV as a setback to TATA. However, that does not hamper the growth plans for the growing profitable domestic operations. FY20E net debt/Ebitda of 3.2x is not a major concern as domestic operation is expected to contribute ~85% of operational profits in FY20E. The JV constituted ~7% (Rs45/sh) to our SoTP value of Rs681. With the JV deal being called off, we knock off the assumed synergy benefits of ~US$350m (US$17/t) and reduce the valuation multiple for TSE from 6.0x to 5.0x. As a result, we reduce our Target price to Rs635, valuing Indian operation at 6.0x FY20E EV/EBITDA and Europe operation at 5.0xFY20E EV/EBITDA. Reiterate Outperformer.
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