Tata Steel merger: Is it good for parent company and bad for subsidiaries?

90s kids will remember the famous Tata Steel tagline - "We also make steel". The iconic campaign, which was meant to showcase the philanthropy projects of the company, may now be more apt for the company's business also as the Tatas have decided to merge seven metal businesses to make a stronger and diversified "One-Tata Steel'.

While analysts say the simplification and unification of the group's metals and mining businesses into a large-sized single entity will drive efficiency and cost reduction, investors of only Tata Steel appear to be happy about the proposed merger.

Tata Steel stock rallied up to 4% even in a weak market but four other merger-bound stocks dipped up to 10%.

Shares of Tata Steel Long Products were trading lower by 9.8%, Tinplate 6%, TRF 5% and Tata Metaliks 3%.

The remaining three companies - The Indian Steel & Wire Products Limited, Tata Steel Mining Limited and S&T Mining Company - are not listed on exchanges.

What triggered the reaction in the stocks is the share swap ratio as part of the amalgamation scheme.

Tata Steel will give 67 shares for every 10 shares of Tata Steel Long Products and 17 shares for every 10 shares of TRF. Anand Rathi said the ratio appears to be in favour of Tata Steel investors.

In the case of Tinplate, Tata Steel will give 33 shares for every 10 shares. And for Tata Metaliks, Tata Steel will give 79 shares for every 10 shares. In both cases, the share swap ratio appears in favour of the subsidiaries.

Anand Rathi said after the announcement of the merger scheme, it is positive on Tata Steel and maintains a buy rating with a target price of Rs 146.

"The share swap ratio appears to be quite fair and in line with the transactions consummated in the past. So I think it is quite fair for the shareholders," said Amit Dixit of Edelweiss Securities.

Analysts say Tata Steel Long Products and Tata Metaliks had to pay royalty to the parent company for iron ore transfers, which won't be required following the merger.

"Tata Steel has been on the roadmap to build a very meaningful long portfolio and the acquisition of NINL and endeavours around that are a manifestation in that direction. I think with this acquisition, with Tata Steel Long Products coming in ambit of Tata Steel, their long products would get one strategic direction," Dixit said.

With the synergies in procurement after the merger, costs related to logistics and warehousing could also come down.

“While we await the company's guidance on potential synergies, we estimate Rs 7.5-8 billion of annual savings, equity dilution of 2.2% and potential EPS accretion of 1.5-2%,” said Jatin Damania, Vice President - Fundamental Research, Kotak Securities.

The brokerage has a reduce rating on the stock and estimates its fair value at Rs 110 per share.

In an exchange filing, Tata Steel said the amalgamation will ensure the creation of a combined entity, leading to ‘One-Tata Steel’ in front of customers which will improve the shareholder value of the merged entity.

"In line with group level 5S strategy – simplification, synergy, scale, sustainability, and speed – the amalgamation will simplify group holding structure, improve agility to enable quicker decision making, eliminate administrative duplications, consequently reducing administrative costs of maintaining separate entities," it said.

The merger is likely to be completed by the end of FY24 following shareholder and regulatory approvals.

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)