Event update: Tata Steel (Outperformer) - Bhushan deal value dilutive but priced in
Event
Tata Steel (Tata) has paid Rs365.6bn to acquire Bhushan Steel Ltd (BSL) on 18 May 2018. BSL has a 5mtpa hot rolled steel capacity, which also includes 1.9mtpa cold rolled steel facility; BSL has enough land that can be used to expand capacity to 8mtpa in future. The total acquisition amount includes upfront payment of Rs352bn to financial creditors, Rs12bn for operational creditors within a year and Rs1.59bn towards 72.65% equity stake. At Bhushan’s capacity of 5mtpa, this translates into capex/t of ~US$1,100/t which is apt for an operational asset.
Details of the deal
- Tata, through its 100% subsidiary, Bamnipal Steel Ltd (BNPL) will initially acquire 72.65% equity stake in BSL for Rs1.59bn. Financial creditors will be allotted equity shares worth Rs145m by virtue of conversion of loan. Tata has purposely kept its shareholding below 75% in order to comply with SEBI’s rule of minimum 25% of non-promoter holding
- As per the company’s plan, BSL will remain a listed entity for some time and continue to show ~Rs560bn debt on the balance sheet. Existing lenders has taken ~37% haircut on the debt, and thereby received Rs352bn. The remaining debt of ~Rs208bn will be bought by Tata for Rs1bn.
- BSL’s new debt of Rs165bn and Rs187bn (upto Rs 90bn loans has an option of conversion into equity shares of BSL) will be funded by Tata as inter-company loan. BSL will initially service external debt of Rs165bn from cash flows, though interest on Tata’s loan (Rs208bn+Rs187bn= Rs395bn) will continue to be accrued on its books but there will be no cash outflows on the same until BSL retires its external debt obligation.
Our view: Deal value dilutive on FY20E earnings but in the price
We believe while the deal would be value accretive over the long term, the same is value dilutive (-Rs52/share) for Tata’s minority shareholders on FY20E earnings. After incorporating BSL’s financials in our numbers, we have reduced our target price to Rs815. We do not see much downside, as the current price already factors in the deal. Though net debt (including Tata Steel Europe) will increase to Rs958bn in FY20E from Rs685bn in FY19E, net debt/EBITDA would marginally increase to 3.3x in FY20E from 3.1x in FY18, which we believe is not a matter of concern. We reiterate our Outperformer rating on the stock with our downward revised target price of Rs815, based on FY20 SoTP value.
Tata Steel is primarily engaged in the manufacturing of steel and its related products. Through its joint ventures, Co. is also engaged in iron ore and coal exploration and mining activities. Co.'s products include hot and cold rolled coils and sheets, galvanized sheets, tubes, wire rods, construction rebars and bearings. Co.'s products are sold under the following brand names: Tata Steelium, Tata Shaktee, Tata Tiscon, Tata Bearings, Tata Agrico, Tata Wiron, Tata Pipes and Tata Structura. Apart from these product brands, Co. also has in its folds a service brand called "steeljunction".
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