The Tata group company announced on Saturday that it has executed definitive agreements for acquisition of the steel business of Usha Martin (UML) through a slump sale on a going concern basis.
The acquisition of Usha Martin’s steel business will help Tata Steel strengthen its position in the long products segment, which is currently much smaller compared to the company’s flat products offerings. It will also help the company improve its product mix in the value-added segment.
The Tata group company announced on Saturday that it has executed definitive agreements for acquisition of the steel business of Usha Martin (UML) through a slump sale on a going concern basis. The deal, which is valued in the range of Rs 4,300-Rs 4,700 crore, will be on a cash consideration basis, subject to closing of the transaction.
Analysts believe that the deal will be at a reasonable valuation and have a limited impact on the leverage ratio. The valuation, as analysts at Kotak Institutional Equities observe is at 6-6.5X potential EBITDA (earnings before interest, tax, depreciation and amortisation) and will be marginally earnings accretive.
Koushik Chatterjee, group executive director (finance and corporate), Tata Steel, said the UML deal will be structured in a manner that it does not cause stress either to UML’s business or to the overall balance sheet of Tata Steel. Speaking to a business news channel, Chatterjee said it will not be a leveraged transaction. Just like in the Bhushan Steel deal, where the company’s debt-equity has been 50:50 and it is expecting a healthy cash flow generation post the phase I integration, plans for UML are also expected to offer similar outcome. “Every tonne of steel of new capacity has to be cash flow accretive and that is our whole focus,” he told the news channel.
Tata Steel’s consolidated total debt stood at Rs 92,147 crore as on March 31, 2018. The company’s debt will reduce by Rs 20,000 crore once the joint venture between Tata Steel Europe and German industrial group Thyssenkrupp AG completes, as it will be transferred to the JV company.
The steel business undertaking of UML comprises a specialised 1 million tonne per annum alloy-based manufacturing capacity in the long products segment based in Jamshedpur, a producing iron ore mine, a coal mine under development and captive power plants. With this, there is also a large scope of earnings improvement, given that peers with similar facilities are earning much higher EBITDA per tonne, analysts at KIE noted.
For FY18, for instance, UML’s standalone EBITDA/tonne stood at `5,516, while that of Tata Steel was at `12,987 and of JSW Steel was at `8,796.
Tata Steel had been scouting for acquisition in the long products steel segment, and its bid for Electrosteel Steels under the insolvency framework was part of that strategy.
However, after losing out to Vedanta on that asset, UML is expected to fill that gap for the company.
According to TV Narendran, managing director of Tata Steel, the company was missing a bit of long products in its portfolio as the 10 million tonne of expansion plans are in the flat products space – 5 MTPA in Kalinganagar and 5 MTPA in Bhushan Steel. Narendran said the company was keen on Electrosteel under the IBC, but that did not happen for some reasons. However, Usha Martin is a good choice for Tata Steel, he told a business news channel.
At present, Tata Steel is looking to take its steel making capacity to 23 MTPA. However, according to Chatterjee, of this, 19 MTPA is in flat products and the company has not grown much in the long steel space. With the acquisition of UML, the company will be able to grow in the long steel construction and high-end automotive market as well, he said.
According to analysts at Jeffries, the deal, albeit small, would lift Tata’s India volumes by 6%, lift long volumes to 4.1 million tonne, which stood at 3.3 million tonne in FY18, and build presence in the value-added specialty steel segment. There could be scope for some operational/logistics synergies given assets are located in Jamshedpur, analysts said.