Until the audited financial results do not come out, nothing much can be commented on the impact of the deal. The cash flowing and NOPAT figures are what I am looking for this time.A leverage increase from 0.4 to 1.1 can only be sustained on the back of strong cash flowa nad better operational efficiency. Hope the steel markets remain bullish for this year and demand remains strong. I am also watching the movements of the chinese steel sector which from a net importer has suddenly become a net exporter.
The report from Outlook is worth going thru ( dated 22.04.2007)
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Tata Steel's shareholders, it seems, just don't like the Corus deal.
On January 31 this year, when Ratan Tata, the group chairman, announced the high-profile takeover of the British steel giant for $13 billion, the company's stock
crashed by over 10 per cent during the day's trading. Over the next nine trading sessions, it had slipped from over Rs 519 to just over Rs 432, a steady fall of nearly 17 per cent. On April 2, when British courts cleared the acquisition, Tata Steel was down 5.7 per cent. When the company announced details of how it will fund the biggest-ever M&A by an Indian firm on April 18, the scrip was down by over 3 per cent. The fall continued next day as Tata Steel lost another Rs 6.50. But since the stock has fluctuated wildly, the investors are probably both confused and unhappy. But why? A reason is that Tata Steel is part-funding the deal by raising $4.1 billion directly and indirectly.
Shareholders are piqued about ways taken to finance the Corus deal.
It has already extended $1.84 billion—from a mix of internal generation, external commercial borrowings and preferential allotment of fresh shares to parent Tata Sons—to its wholly-owned UK subsidiary. Now, it plans to raise the remaining
amount through a domestic equity rights issue, another local rights issue of convertible preference shares and a fresh issue in either an American or European stockmarket. And therein lies the problem. The investors are piqued that this will lead to an equity dilution of over 46 per cent and, impact the future earnings per share (EPS). If the EPS comes down, so should the market valuation. Agrees Sanjay Jain, senior analyst, Motilal Oswal Securities, "The market was expecting a lower dilution." While Tata Steel claims the markets are simply over-reacting, Macquarie Research, a Mumbai-based analyst firm, is confident that the funding plan is "quite positive and EPS-accretive". Another reason for the scrip volatility is the huge debt the Tatas are assuming on the balance-sheets of both Tata Steel and its UK subsidiary. Despite the equity dilution, Tata Steel's debt-equity ratio is expected to go up from the current 0.4 to 1.1 over the next 12 months. Amitabh Chakravorty, head (equities), Religare Securities, says, "A company in a commodity business cannot take on too much of debt as any downturn can lead to painfully high fixed costs." However, some analysts feel that the Tatas can still service the higher debt, dilute their equity base, and show higher EPS. One of them feels that "despite the leveraged buyout of Corus, strong cashflows over the next two years should ensure sufficient funds for Tata Steel's expansion plan and reduction of debt." Although Chakravorty has his doubts, he adds that "this is the first time an acquirer will use the acquiree's (Corus) balance sheet to pay off the debt." Also, the shareholders are still unsure about the $2.66 billion that the Singapore-based Tata Steel Asia will raise to part-finance the Corus takeover. There's a feeling that a substantial chunk of this money will either come from Tata Steel or impact its balance-sheet in some form or the other. Either way, there will be an impact on earnings and, hence, the stock price. So, once these details become clearer in the near future, the Tata Steel scrip may witness yet another downturn. Finally, Tata Steel's future depends on the global steel outlook. If demand and prices remain as firm, the Corus takeover will be a plus. If they don't, most shareholders will simply say goodbye and exit the stock.
