Mumbai: Tata Steel Global Holding Pte Ltd, the Singapore-based subsidiary that owns the international steel and mining assets of Tata Steel Ltd, the country’s largest steel maker, is in talks to raise at least $1 billion (about Rs4,400 crore) through private equity (PE) transactions or a private placement of shares with institutional investors, and likely use the money to fund the purchase of a coal or iron ore mine or part of one.
In the wake of a sharp surge in raw material prices, Tata Steel and other Indian steel makers are looking to acquire iron ore, limestone and coal mines abroad.
The private equity deal could be in exchange for an 8-10% stake in Tata Steel Global, said a senior transaction adviser at a multinational investment bank operating in India who is familiar with the development.
See: Funding matters
This would peg the subsidiary’s enterprise value at more than $12 billion.
The current market capitalization, or market value, of the parent Tata Steel in local bourses has slipped just below $10 billion, following a slump in domestic equity markets this year.
A second investment banker, with another foreign firm, confirmed that Tata Steel is in discussions with private equity firms and some other large funds. Both bankers did not want to be identified as the deal hasn’t been finalized yet.
A Tata Steel Ltd spokesperson, in reply to a detailed email query, said he was “not in a position to comment”.
Two analysts said the move is logical.
“Tata Steel is looking to buy overseas coal assets,” said Manish Sonthalia, head of equity research at local brokerage Motilal Oswal Financial Services Ltd. Loans taken for funding the company’s Corus acquisition have been taken care of and there is no need for fresh loans, he added.
Tata Steel plans to buy assets, mainly iron ore, coal and limestone mines, worth $2 billion, said a steel sector analyst at a foreign brokerage in India who did not wish to be named. The fund-raising could only have a positive impact on the parent firm’s shares traded locally, he added.
Tata Steel Global’s assets include British steel maker Corus, Tata Steel Thailand (formerly Millennium Steel), Tata Steel Global Minerals and NatSteel Asia.
Corus, Europe’s second largest steel producer with annual revenues of around £12 billion and annual crude steel production of more than 20 million tonnes (mt), was acquired by Tata Steel in 2007 for £6.2 billion.
While Tata Steel’s operations in India have sufficient primary raw material such as iron ore to feed its plant in Jamshedpur, it has to import a third of the coal it needs. Corus is also largely dependent on long-term contracts with suppliers and so-called spot purchases.
This has been hurting Tata Steel’s consolidated results since the acquisition, as the British steel maker accounts for nearly one-third of the parent company’s consolidated revenue.
The two entities together hold reserves to meet just about 20% of their raw material requirements, increasing the cost of steel production.
Steel companies are scrambling to grab whatever mining assets they can as iron ore prices have nearly doubled this year coking coal rates have surged threefold.
“The perception of risk on the global subsidiary holds more for the UK steel firm,” said a third analyst who tracks Tata Steel for another foreign brokerage.
According to this analyst, though the outlook for Indian steel companies is not bright in the current environment, it is unlikely to affect valuation of Tata Steel Global.
Tata Steel, which was valued at Rs68,312 crore early this year, has seen a 39% slump in its market capitalization to stand at Rs41,775 crore as on Thursday.
The stock, part of India’s benchmark index Sensex, fell 1.65% to close at Rs571.80 on the Bombay Stock Exchange on Thursday, while the 30-stock benchmark index fell 1.75%, or 248.45 points, to end at 14048.34. The Sensex has fallen by at least 30% this year.
Tata Steel, along with its associates, has operations in 24 countries and commercial presence in more than 50 nations.
The company is looking at forming iron-ore and coal ventures in Mozambique and is scouting for limestone ventures in Oman, chairman Ratan Tata said at the company’s shareholder meeting on Thursday.
Tata Steel Ltd said on Thursday its consolidated net profit, including Corus, surged 60% to Rs3,900 crore in the first quarter ended 30 June, on increased prices and output of high-grade products. Excluding Corus, the company had last month posted a 22% jump in June-quarter profit to Rs1,422 crore.
Debarati Roy and Paresh Jatakia of Bloomberg contributed to the story.