Tata Steel merges 7 of its subsidiaries for simpler structure

On Friday last week, Tata Steel announced that it had decided to merge seven of its group companies with itself. This included wholly owned subsidiaries and associate companies. Out of the seven companies merged into Tata Steel, 4 were listed entities while 3 were unlisted entities. The 4 listed entities that were merged into Tata Steel were Tinplate Company Ltd, Tata Steel Long Products Ltd, Tata Metaliks Ltd and TRF Ltd. It may be recollected that Tata Sponge Iron Ltd had changed its name to Tata Steel Long Products Ltd about 3 years back in 2019.

Among the 3 listed entities that were absorbed into Tata Steel were Indian Steel and Wire Products Ltd, Tata Steel Mining Ltd and S&T Mining Company Ltd. Now all these 7 entities would be part of Tata Steel Ltd. The amalgamation of these 7 companies into Tata Steel has already been approved by the board of Tata Steel. At a strategic level, the idea behind this move is to simplify the corporate structure and bring about synergy so as to save costs and improve the EBITDA of the various businesses. Analysts expect that all these amalgamations into Tata Steel would severally and jointly be EPS accretive for Tata Steel.

The board has also worked out the swap ratio for the various companies. For instance, shareholders of Tata Metaliks will get 79 shares of Tata Steel for every 10 shares of Tata Metaliks held by them. That is a 2% premium over the market price. Similarly, the shareholders of Tinplate Company Ltd will get 33 shares of Tata Steel for every 10 shares of Tinplate held by them. This is again a 1% premium to the market price, so the shareholders of the merging companies should not have much to complain about.
But then not all the swap ratios have been at a premium. For instance, the shareholders of Tata Steel Long Products will get 67 shares of Tata Steel for every 10 shares of Tata Steel Long Products held by them. However, this represents a 7.8% discount to the market price. A sharper discount is visible in case of TRF. The shareholders of TRF will get 17 shares of Tata Steel for every 10 shares of TRF held by them. In terms of price parity, this works out to a discount of 53% to market price. Both these swaps favour Tata Steel shareholders.

For the three unlisted companies, Tata Steel will pay Rs426 per share to the shareholders of Indian Steel & Wire Products Ltd. However, the other two listed companies viz. Tata Steel Mining Ltd and S&T Mining Co. Ltd are already wholly owned units of Tata Steel and the merger is just an arrangement to make the structure simpler and leaner. According to Tata Steel, this operational integration would result in better facility utilization and would also drive synergy benefits. IT is also estimated that the resources of these merged entities can be pooled while distribution networks can collaborate.
It will also create a value chain with better control over resources and end markets and ensure better control over costs and supply. In addition, Tata Steel also expects the rationalization of logistics costs due to the merger. Today, there is a major component of royalty paid on iron ore sourcing by the companies, and that is likely to come down sharply post the amalgamation. The estimate is that the net savings could have a net present value or NPV of around Rs1,000 to Rs1,300 crore, which would be a substantial figure. But above all, this would be in sync with the Tata Group’s attempts to simplify corporate structure.