Tata Steel Merger Details: Why did Tata Steel merge its subsidiaries?

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Tata Steel Merger Details: Why did Tata Steel merge its subsidiaries?

Tata Steel Merger Details: An Overview

Tata Steel's board has approved the merger of seven of its subsidiaries related to the metal and mining business into itself. The subsidiaries include both listed and unlisted companies. It is in line with the company's long-term vision of simplifying its business. Since 2019 Tata Steel has reduced 116 associated entities - 72 subsidiaries have ceased to exist, 20 associates and joint ventures have been eliminated, and 24 companies are currently under liquidation.

What change the current merger brings for the Tata Steel investors and individual companies' shareholders? Let us try and understand the implication in this article.

Tata Steel Merger Company List

The companies that are going to be merged with Tata Steel include the subsidiaries - Tata Steel Long Products (TSPL), Tata Metaliks, TRF, Indian Steel & Wire Products, The Tinplate Company of India, Tata Steel Mining, and S&T Mining Company. 

Why is Tata Steel merging the subsidiaries?

Tata Steel is the majority holder in all these subsidiary companies. The board proposed amalgamation to bring about greater synergies, reduce costs and bring higher efficiency. It will also improve agility across businesses based on the strong parental support from Tata Steel leadership.

The consolidation of downstream operations will enable growth in value-added segments by leveraging Tata Steel's nationwide sales and marketing network.

Kotak Securities estimated Rs 750-800 crore of annual savings, equity dilution of 2.2%, and potential EPS accretion of 1.5-2% and is likely to be completed by end of FY’24.

Tata Steel Merger Ratio: What happens to the listed companies' shares?

All the companies will seize to exist post the merger. For the listed companies, the investors will receive Tata Steel shares as per the share swap ratio. The share ratio for different companies is as follows:

  • For Tata Steel Long Products investors, Tata Steel is to give 67 shares for every 10 shares of Tata Steel Long Products.
  • Tata Steel will give 17 shares for every 10 shares of TRF.
  • Investors will get 33 shares of Tata Steel for every 10 shares of The Tinplate Company.
  • Shareholders of Tata Metaliks will get 79 shares of Tata Steel against every 10 shares of Tata Metaliks

Analysts' take on the merger

Rating agency Fitch: The firm expects the merger will result in higher EBITDA from procurement, marketing synergies, and lower royalty payments. The financial gains are likely to be small and could take several quarters to be realized, depending on the pace of regulatory approvals.

ICICI Direct: The proposed scheme of amalgamation has been undertaken to realize better synergies of business of the entities involved in the scheme. The proposed scheme would lead to operational integration and better facility utilization, rationalization of logistics costs, operationalized efficiency, simplified structure, management efficiency, etc.

Tata Steel Merger Impact: Analysts' Call

JP Morgan: The firm maintains an OVERWEIGHT rating with a target price of Rs 140 per share. The firm expects a very marginal impact from the consolidation driven by the company's financials. Markets and investors, anyway, look at the earnings and balance sheet on a consolidated basis and all the subsidiaries are part of the consolidated accounts.

Motilal Oswal: The firm has maintained a "NEUTRAL" rating with a target price of Rs 106. Motilal Oswal also does not expect any incremental profits to accrue to the group and expects no incremental profits other than the elimination of regulatory costs such as iron ore royalty. The company will save on other regulatory costs, such as audits and filings/compliance under various Acts, which are not only costly but also time-consuming, especially in cases where the size of operations does not justify the regulatory costs.

Edelweiss Securities: The firm has maintained its "HOLD" rating on Tata Steel with an unchanged target price of Rs 198.5 per share. It sees lower royalty, iron ore costs, and potential synergies as the key benefits over the medium to long term. It also believes that this amalgamation will provide a firm direction to the group’s plan of enhancing its long portfolio. It expects the benefits of incremental EBITDA from the subsidiaries to be offset by the dilution in the shareholding. 

When will the Tata Steel merger happen?

The proposed transactions could take several quarters to be completed. The mergers will be subject to a regulatory approval process, which includes approval by stock exchanges and the National Company Law Tribunal (NCLT).

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