Tata SteelNSE 1.27 % has backed the valuation on the Bhushan SteelNSE 4.85 % (BSL) acquisition, the first major successful resolution under the dedicated bankruptcy code, arguing that investment in a similar sized greenfield project would have led to significant time- and cost-overruns.
“The time value of money is critical for greenfield projects in India… land acquisition and clearances, and the time to build and ramp up fully could easily take more than 40 months,” Koushik Chatterjee, CFO, Tata Steel, told ET.
“Having built a new greenfield capacity in the last few years, and considering the stage of the commodity cycle and strong fundamentals of the industry in India, one of the key valuation metrics for us was the time adjusted replacement cost of the facilities,” Chatterjee said.
A greenfield project of 5 million tonne per annum (MTPA) hot rolled coils (HRC) and 2 MTPA cold rolling (CR) mill will require a capex of Rs 31,000 crore, assuming Rs 5,100 crore per million tonne of HR capacity, plus cost of infrastructure.
This does not take into account the other downstream facilities Bhushan has, Chatterjee said. Assuming a four-year gestation period to build the facilities, the present value of four-year potential cash flows is another Rs 13,000 crore to Rs 15,000 crore.
“Even without the option value of future growth and the downstream portfolio, the economic value will be in the range of Rs 44,000–46,000 crore, which compares favourably to our acquisition cost. Our focus will obviously be to leverage the asset footprint from the acquisition to create future value,” Chatterjee added.
FINANCIALS BEHIND THE PURCHASE
Analysts have said the purchase will enrich Tata Steel’s automotive steel portfolio. “BSL’s presence in the value added, fast growing auto segment complements Tata Steel’s strategy. In our view, the transaction cost of $1,060/t is fair as it gives Tata Steel an opportunity to enhance its presence in the value-added auto segment,” Edelweiss Securities analyst Amit Dixit said in a recent report.
The total cost of the BSL acquisition is Rs 35,200 crore for settlement of the debt, which has been paid upfront to the lenders of Bhushan Steel, and innovation of the remainder debt. As part of the Resolution Plan approved by NCLT, Bhushan Steel has issued new shares to Tata Steel, which gives controlling interest of around 72% in the company, while lenders will hold around 12%, and the rest of the equity will be held by the existing shareholders.
Chatterjee said the overall capital structure for the transaction has been prudently designed, keeping in mind the potential earnings profile of the business. The acquisition has been funded by around Rs 18,000 crore of Tata Steel’s own capital, including internal generation and around Rs 16,500 crore of debt drawn on the 100% owned subsidiary company Bamnipal Steel that holds the equity of Bhushan Steel.
COST SAVINGS AND SYNERGIES
Within hours of closure of the formalities last Friday, Tata Steel deputed around 35 experienced managers including key managerial personnel to the company across different operating sites, Chatterjee said. “They have had several levels of engagement with our new colleagues in Bhushan Steel and are enhancing their understanding of the company’s activities. The atmosphere has been warm and welcoming and we value that immensely,” Chatterjee said.
“We see a lot synergy potential in manufacturing, commercial, network optimisation, procurement and SG&A.”
FINANCING AND LIQUIDITY
Given the large size of its balance sheet, Tata Steel has always been looking at opportunities both domestically and overseas to raise capital, Chatterjee said.
Tata Steel’s strong operational performance in India in Q4 FY18, with an EBIDTA margin of 30% and improvement in its European performance on a quarter-on-quarter basis, has led to a significantly better outlook. A strong year-end liquidity, with more than Rs 22,800 crore of cash and cash equivalent, has also added to the cheer.
The pension restructuring in the UK is now complete following the Regulated Apportionment Arrangement process that was approved by the UK pension regulator.
“We now have a new closed scheme following the member consent process, with around 83,000 members. This represents around 69% of the members of the closed British Steel Pension Scheme who would continue to be members of the new scheme,” Chatterjee said.
The new scheme has an asset size of around 11 billion while the liabilities are around 8.9 billion as of March 31, 2018. “The one-off credit in the last quarter financial statement was more to reflect the non-cash accounting treatment of the actuarial liabilities, which reflect the surplus value of the assets over liabilities,” Chatterjee explained.
This also makes the scheme more sustainable and allows it to pursue a low risk investment strategy, he added.
Source: Economic Times