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Morningstar | TS Updated Forecasts and Estimates from 23 Apr 2019

OCTG producer Tenaris has entered into an agreement to acquire IPSCO Tubulars, which is composed of the U.S. operations of Russia-based OCTG producer TMK. With a purchase price of $1.2 billion, this is a moderately sized acquisition for Tenaris (which has a current market cap of about $17 billion). The acquisition would boost Tenaris' total OCTG capacity by about 20% (although only 9% for higher-margin seamless pipes).

Although we aren't updating our fair value estimate of $27 per share yet, we may revise it up in the range of $0.25 to $0.50 per share after reviewing the deal terms in more detail. At first glance, the deal is about fairly valued, with a purchase price of $1.2 billion or about 12.4 times IPSCO's 2018 operating profit (right in line with our current Tenaris valuation).

However, there would likely be room for Tenaris to create incremental value via both cost synergies and higher pricing from enhanced market power. In support of the latter, Tenaris' share of the U.S. OCTG market by volume would increase about 13% based on IPSCO's 2018 production levels (adding to a base share for Tenaris of perhaps 30%-35%), giving a post-acquisition Tenaris around half of the total U.S. market. Furthermore, IPSCO (via its parent TMK) has been one of the few competitors to Tenaris in providing premium OCTG products.

On the other hand, the ability of Tenaris to enhance its market power could provoke antitrust concerns which would obstruct the deal. Likewise, regulators could mandate a sale of IPSCO's premium OCTG intellectual property (or a transfer of its licensing agreements with TMK). Furthermore, if Tenaris is able to use enhanced market power to generate conspicuously large economic profits in its U.S. operations, that would certainly weaken the case for the Section 232 import tariffs that are currently propping up pricing in the U.S. market.