The world's not enough for Tatas
Tata Steel and Corus may find it difficult to achieve the synergies and cost reductions they are hoping to generate by combining their operations into the world’s fifth-biggest entity, analysts warned on Wednesday.
By TNN |
MUMBAI: Tata Steel and Corus may find it difficult to achieve the synergies and cost reductions they are hoping to generate by combining their operations into the world’s fifth-biggest entity, analysts warned on Wednesday.
“The strategic rationale is difficult to comprehend,” Merrill Lynch said in a report on Wednesday. “Despite an arguably attractive offer of 455 pence per share, the potential Corus acquisition does not offer cost synergies or a growing market,” the note added.
“While the acquisition can quickly catapult Tata Steel towards global scale, with little immediate benefits visible, we expect concerns on likely dilution, integration issues, longer-term opportunity loss to weigh on the stock price in the near term,” brokerage firm CLSA Asia Pacific Markets said.
Tata Steel on Tuesday said that it has made an indicative, non-binding, all-cash bid for Corus at 455 pence per share, valuing the European giant at an enterprise value of about $10bn. A final offer is expected sometime soon.
On Wednesday, Standard & Poor’s (S&P) placed Tata Steel’s BBB corporate long-term corporate credit rating on credit watch with negative implications. S&P also placed Tata Steel’s BBB foreiogn currency rating on credit watch with negative impications.
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“In S&P’s view, the size of the acquisition and the potential cash outflow of about $10bn that Tata Steel may make in its offer to Corus could have an advser impact on its financial risjk profile,” said S&P credit analyst Anshukant Taneja. A successful acquisition, however, can potentially improve the business profile of the merged entity. In resolving the Creditwatch placement, S&P will seek further information on the progress of the offer and the potential means of financing.
Analysts tracking the sector said the “extended timescale for visible benefits” is likely to affect the stock price performance. Tata’s main purpose behind the acquisition is to help Corus cut costs by providing it access to cheap raw materials such as iron ore and steel slabs.
Corus has little access to iron ore mines and its steel slab-making facilities turn out products that are more expensive than those in developing countries. Tata’s acquisition gameplan has been to use its low-cost mines and slab-making facilities to supply to plants near growing markets around the world.
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According to World Steel Dynamics, Indian steel slab producers have a 22% cost advantage over European companies. While it takes $78 per tonne in India, the cost in Europe is about $100 per tonne. However, Tata Steel does not have any spare slab-making capacity. It is establishing new capacity of about 1.8mt, but that is completely dedicated to NatSteel of Singapore and Millennium Steel of Thailand. Tata’s new slab plant is likely to come up only by about ‘10 when the 6mt Orissa plant gets commissioned.
Till then, analysts say, there will be little benefits. Even if Tata Steel finds a way to export slabs, freight costs from India to Europe are higher than those from Russia to Europe. This means that Tata Steel could be better off setting up a slab-making facility on the fringes of EU than in far away India.
There is also a problem with iron ore. A huge controversy is raging in the country over whether or not to ban exports of iron ore. Several domestic companies, including Tata Steel, have said ore exports should be banned and the mineral should be used to make value-added steel.
The government, analysts say, is unlikely to allow iron ore exports in large quantities. Plus Tata Steel itself would need new iron ore mines which could take about three years or so.
Corus is a high-cost operation and its plants, especially in the UK, are not considered very efficient. Tata Steel may face a difficult choice in dealing with this issue even as a whisper of plant closures or job losses is likely to produce a public outcry.
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Corus, at the price of 455 pence per share, is valued higher than Tata Steel, though its earnings performance has been considerably weaker. As of ‘06-07, Corus at the takeover price is valued 11.3 times price-to-earnings ratio and 6.5 times at EV/EBITDA per tonne, compared with Tata Steel’s 7.4 times PER and 4.2 times.
Since the proposed Tata Steel special purpose vehicle (SPV) is likely to be merged with Tata Steel that could dilute equity. Tata Steel also, thanks to this acquisition, will have to dilute equity further for raising money for its new expansion plans in Orissa and Jharkhand.
“As Tata will pay significantly high valuation for acquiring Corus and will have to dilute at lower valuation it may result in value destruction for existing shareholders,” Mumbai-based Brics Securities said in a report.
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