Tata metal companies merger a big positive; TRF shareholders will be only losers from this: Analysts

Most of the swap ratio is aligned with prevailing market prices. TRF shareholders will be the only losers as the stock had rallied massively in the last few weeks.

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Tata Group on September 23 informed the stock exchanges that it will merge all metal companies with Tata Steel to create an even bigger behemoth. According to the regulatory filing Tata Steel Long Products, The Tinplate Company of India, Tata Metaliks, TRF, the Indian Steel & Wire Products, Tata Steel Mining and S&T Mining Company will merge with Tata Steel.

The proposed amalgamation is also part of Tata Steel’s continuing journey to simplify the group holding structure, which analysts believe this is a positive move as it will not just bring synergy but also some savings for Tata Steel.

“From a strategic perspective, it (merger) makes perfect sense,” said independent market expert Anand Tandon told CNBC TV-18.

The proposed amalgamation will simplify group holding structure by eliminating multiple companies within the group. It is expected to lead to better utilisation of common facilities, sharing of best practices, elimination of duplication and multiplicity of compliance requirements and rationalisation of administrative expenses among other things.

The management of the company said that the merger will save Rs 700 crore that it pays as royalty fees to the government.

Rakesh Arora of Go India Stocks also believes it is a long term positive as it cleans the structure. “It is also a necessity. Having acquired Neelachal Ispat under Tata Steel Long Products, they have to make an investment of $10 billion over next two years. And, there is no way Tata Steel Long Products’ balance sheet can support that kind of investment,” he added.

Gainers, losers

Of the seven smaller companies that are merging with Tata Steel, four of them are listed. The share swap ratio is as following: for every 10 shares of Tata Steel Long Products, 67 shares of Tata Steel; for every 10 shares of The Tinplate Company of India, 33 shares of Tata Steel; for every 10 shares of Tata Metaliks, 79 shares of Tata Steel and for every 10 shares of TRF, 17 shares of Tata Steel.

Most of the swap ratio is aligned with prevailing market prices. Only losers will be TRF shareholders as the stock had rallied massively in the last few weeks. The stock hit 5 percent lower circuit on September 23.

“For TRF, it will be a big downside,” Arora pointed out.

Vikash Singh, an analyst tracking metals & mining at Phillip Capital, also said he doesn’t see much changing from a financial point of view. Moreover, he added that there is no arbitrage opportunity in smaller companies either.

On being asked if Tata Metaliks shareholders, which usually trades with a premium over Tata Steel due to its nature of business, will end up losing more than gaining from the merger, analysts doubted that such was a case.

“Tata Metaliks is taking iron ore from Tata Steel so there are a lot of related party transactions. Part of profits goes from Tata Steel to Tata Metaliks. There is no major change from Tata Metaliks shareholders. They are better off with Tata Steel in the longer run,” said Arora.

Ravi Singh VP, Head – Research, Share India, said  Tata Steel stock is also reflecting the investors confidence in the counter with a surge in the volumes which may push the stock to Rs 110 levels on short term and Rs 115 on a long term perspective.

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