In what will be a mega-merger of sorts, the Tata Group is merging seven of its metal companies into Tata Steel.
Under the chairmanship of Natarajan Chandrasekaran, the auto to aviation and software conglomerate has been looking to consolidate its various businesses to bring simplicity and scale across the group. So, for instance, all the fast-moving consumer goods and foods businesses housed in various Tata companies were brought under Tata Consumer Products earlier.
The latest move to merge the metals businesses into Tata Steel will carry forward this agenda.
The companies that are being merged into Tata Steel are – Tata Steel Long Products Ltd, The Tinplate Company of India Ltd, Tata Metaliks Ltd, TRF Ltd, The Indian Steel and Wire Products Ltd, Tata Steel Mining Ltd and S&T Mining Company Ltd. These companies were subsidiaries of Tata Steel.
This decision was taken at Tata Steel’s board meeting held on Thursday. The belief is that the resources of the merged entities can be pooled to unlock the opportunity for creating shareholder value. The marketing and distribution network of the companies could collaborate too.
“In line with group level 5S strategy – simplification, synergy, scale, sustainability, and speed – proposed amalgamation will simplify group holding structure, improve agility to enable quicker decision making, eliminate administrative duplications, consequently reducing administrative costs of maintaining separate entities," Tata Steel said.
Tata Steel Long Products (TSLP), for instance, is primarily engaged in the production and marketing of sponge iron, which is a single-end use (steel making) and a single-grade product. It has one of the largest speciality steel plants in India in the special bar quality segment with an annual capacity of one million tonnes per annum. It has a strong presence in the wire rod market.
“The amalgamation will consolidate the business of TSLP and Transferee Company (Tata Steel) which will result in focused growth, operational efficiencies, and business synergies, the two companies said.
The Tinplate Company is primarily engaged in manufacturing tinplate, tin-free steel and other related products, with its plant in Jamshedpur, Jharkhand.
Tinplate and Tata Steel will be able to share best practices, and cross-functional learnings, and utilize each other’s facilities more efficiently, it said.
“The proposed amalgamation will provide an opportunity for reduction of operational costs through the transfer of intermediary products between companies, better order loads, synergies from sales and production planning across the business,” the companies said.
Tata Steel is looking at cost savings of around Rs 1,500 crore, including Rs 700 crore royalty paid by Tata Steel to the government, the company’s CFO Koushik Chatterjee told a TV channel.
Jatin Damania, vice-president – fundamental research at Kotak Securities said the move is a positive step.
"It will simplify the corporate structure, plug leakage of addition royalty payments on inter-company iron ore transfers, reduce corporate overheads, enable various businesses with the higher financial flexibility to progress on growth projects and bring in further operational, procurement and tax synergies," said Damania.
He estimates the merger will lead to Rs 750-800 crore in annual savings, equity dilution of 2.2 per cent and potential earnings per share accretion of 1.5 per cent to 2 per cent.
According to the share swap ratio, 67 Tata Steel shares will be offered for every 10 shares of TSLP., 33 shares of Tata Steel for every 10 shares of Tinplate, 79 shares of Tata Steel for every 10 shares of Tata Metaliks and 17 shares of Tata Steel for every 10 shares of TRF.
As of Friday afternoon, shareholder reaction was mixed. Tata Steel shares were trading 1.4 per cent higher on the BSE at Rs 105.05. However, TSLP was down 9 per cent to Rs 681. Tinplate Company was down 5.8 per cent to Rs 318.70, Tata Metaliks fell 3.1 per cent to Rs 776 and TRF declined 5 per cent to Rs 355.65.