Tata Steel Ltd, India’s largest private sector steel firm, which acquired Corus Group Plc. in January, has decided to dispose of the assets of the loss-making aluminium division of the acquired company and sell stocks worth $2.4 billion (Rs10,080 crore), as it goes about raising finances for the $12 billion acquisition. “We have decided to sell off the two aluminium smelters that remain with Corus,” said T. Mukherjee, deputy managing director, Tata Steel.
The company announced after a meeting of its board on Tuesday that it would make a Rs3,655 crore rights offer, by selling shareholders one share for every five they hold at a price of Rs300. That’s at a significant discount to Tuesday’s closing price of Rs529. And it will make a Rs4,350 crore preference shares offer—these can be turned into shares at Rs600 each after two years. Shareholders will get one preference share for every seven shares they hold and earn an interest of 2% a year on this.
The sale of the aluminium extrusions business of Corus to Aleris International Inc. was completed in calendar 2006, prior to Tata Steel’s bid for Corus. The remaining aluminium business of Europe’s second largest steel maker consists of two aluminium smelters that have been reeling under the impact of high energy costs in the Netherlands and high costs of the key raw material, alumina.
Aluminium manufacturing is a highly energy-intensive business and one of the keys to operating an aluminium smelter profitably is to locate it close to sources of low-cost raw material or where power costs are low. Neither of this applies to the Netherlands.
The aluminium division of Corus posted a turnover of £138 million (Rs1,145.1 crore) for the nine months ended September 2006 and an operating loss of £16 million. Tata Steel has decided to sell the marginal aluminium business because it wants to concentrate on the steel business and improve the profitability of Corus that has an operating profit margin that’s almost one-third of Tata Steel.
Mukherjee admitted that “realizing synergies would take time”. “We had predicted $350 million of synergies from the Tata Steel-Corus combination. Assessment and identification of areas where synergies can now be realized has started,” added Koushik Chatterjee, vice-president (finance), Tata Steel.
Tata Steel would be helped by rising steel prices, said an analyst. “Steel prices are likely to remain buoyant for a while, so that will be a big help for Tata,” said Niraj Shah, an analyst at Prabhudas Lilladher, a Mumbai-based brokerage. “There will not be many concerns as long as Corus is profitable,” he added.
To fund the acquisition, Tata Steel will contribute $4.1 billion, including the $2.4 billion it will raise from the rights offer. Banks will raise $6.14 billion in debt and provide $2.66 billion as bridge finance.
The total $12.9 billion is inclusive of working capital, or money a company needs to run its operations for a year.
Both Moody’s Investor Service and Standard & Poor’s had previously said that they might lower Tata Steel’s debt rating because the acquisition was being funded mainly through debt.
But analysts such as Rahul Jain, who works with brokerage Man Financial-Sify Securities, believes the acquisition was a good idea. “Even in a worst-case scenario, where all the acquisition money is paid through debt, the deal is significantly earnings accretive,” he added.
Tata Steel shares closed 0.9% down on the Bombay Stock Exchange on Tuesday. The exchange’s benchmark index of 30 stocks, Sensex, closed 0.7% down.
(Bloomberg contributed to this story.)