Bhushan Steel auction: Fear of winner's curse pulls down Tata Steel shares

Steel image
Shares of Tata Steel fell by 6 per cent at Rs 648 on Mondar — losing Rs 45 billion of market value — as investors are worried about the massive premium paid by the company for Bhushan Steel as compared to its rival JSW Steel. Its bid for Bhushan Steel is pegged at over Rs 400 billion, which includes Rs 352 billion of upfront payment to financial creditors and another Rs 12 billion to operational ones.

Tata Steel also sweetened the deal with 12.5 per cent equity of Bhushan Steel to the lenders. JSW offered only Rs 280 billion of payment to banks. Tata Steel is also leading the race for Bhushan Power & Steel and its offer is pegged at Rs 170 billion, with another Rs 75 billion as equity infusion.

But the investors do not want a re-run of a Corus Steel-like acquisition, which resulted in the company losing billions of dollars and finally led to its merger with ThyssenKrupp. “The additional acquisition would increase the debt burden of Tata Steel India, which is not a good sign,” said an analyst with a leading brokerage.

Shares of Bhushan Steel, however, went up by 20 per cent to Rs 53.80, as investors expected a turnaround under the Tata management.

Some analysts, however, said the threat of winner’s curse for Tata Steel is over-rated. “At first glance, both the acquisitions look expensive with enterprise value per tonne of $1,125-1,225 — higher than the Kalinganagar Phase-2 expansion of $750 a tonne and industry benchmark of $1,000 a tonne for an integrated plant up to HR (hot rolled) coil stage. But we perceive long-term potential upsides from Ebitda (earnings before interest, tax, depreciation and amortisation) improvement — from the current Rs 7,800 a tonne at 58-60 per cent utilisation to Rs 11,000 a tonne via enhanced capacity utilisation; efficient raw material sourcing and operating synergies; market leadership in automotive steel segment; and possibility of further brownfield expansion at Bhushan Steel,” analysts with Edelweiss Financial said.

Sources said maybe the market overreacted because Bhushan Steel has a liquid steel capacity of 5.6 million tonnes (mt) and finished steel capacity of 5 mt. But without much investment, sources indicated that the finished steel capacity could be ramped up to 8 mt. But beyond 8 mt, the company would need more land.

Plus, Bhushan Steel has an iron ore mine with reserves of 100 mt that it bagged through e-auction. The mines have high-grade reserves with 60-63 per cent iron content.

Tata Steel, too, has iron ore, manganese, chromium ore mines in Odisha. It can apply for more mines and a substantial presence in Odisha with its Kalinganagar plant, which has a capacity of 3 mt. The company’s board has approved the second phase of expansion of 5 mt.

Tata Steel would also benefit from Bhushan Power & Steel, which has a 2.5-mt HR capacity and 1.3-mt cold-rolled capacity. The steel making capacity can be ramped up to 3.5 mt at a nominal investment. Bhushan Power & Steel has also bagged an iron ore mine, which has reserves of around 81.9 mt.

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