Can you tell me how the swap ratio for the Tata Steel mergers of 7 companies would work out and how many shares these shareholders would get?
Answer
Answer
As part of simplifying the holding structure of the Tata group companies, Tata Steel announced the merger of 7 of its group companies with itself. Out of the 7 companies that are being merged into Tata Steel, 4 are listed entities while 3 are unlisted entities. The 4 listed entities include Tinplate Company, Tata Steel Long Products (formerly called Tata Sponge Iron), Tata Metaliks Ltd and TRF (Tata Robin Fraser) Ltd. The 3 unlisted companies absorbed into Tata Steel include Indian Steel and Wire Products Ltd, Tata Steel Mining Ltd and S&T Mining Company Ltd. Now all these 7 entities will be subsumed into Tata Steel.
While the merger has already been approved by the board of Tata Steel, the purpose of this merger is to simplify the corporate structure and bring more synergy, use common facilities better and also save costs in the process. It is estimated that the net present value (NPV) from this merger would be around Rs1,000 crore to Rs1,500 crore. It is true that since it is a stock swap, the overall series of mergers would result in dilution of equity and EPS for Tata Steel. However, most analysts reckon that the benefits accruing from this merger in the form of EPS accretion and EBIT accretion should offset the equity dilution.
Let me now turn to the swap ratio and first talk about the swap ratios that are prima facie favourable to the shareholders of the merging companies. Shareholders of Tata Metaliks will get 79 shares of Tata Steel for every 10 shares of Tata Metaliks held. That is an approximate 2% premium to the CMP. At the same time, the shareholders of Tinplate Company Ltd will be entitled to get 33 shares of Tata Steel for every 10 shares of Tinplate held. This once again reflects a 1% premium to the CMP, so the shareholders of the merging companies should not have much to complain about. Now for the other side of the deal.
Some swap ratios are benefiting Tata Steel shareholders more than the merging companies. The shareholders of Tata Steel Long Products (formerly Tata Sponge Iron) will get 67 shares of Tata Steel for every 10 shares of Tata Steel Long Products held. This is a clear 7.8% discount to CMP. A much sharper discount is seen in case of TRF, wherein the shareholders will get 17 shares of Tata Steel for every 10 shares of TRF held. In terms of current market price comparison, this deal works out to a discount of 53% to the CMP, which is huge. Tata Steel Long Products and TRF mergers clearly favour shareholders of Tata Steel Ltd.
Tata Steel will pay Rs426 per share to shareholders of Indian Steel & Wire Products Ltd, the unlisted associate company. However, Tata Steel Mining Ltd and S&T Mining Co. Ltd are already 100% owned units of Tata Steel and so no pay-out has to be made for them. This integration would provide better facility utilization and drive synergy. There will also be pooling of resources and sharing and collaboration of the distribution networks. Above it creates an integrated and seamless value chain from mining to end use, giving much greater control over resources and also over the key markets.