Synergy benefits for Tata Steel from Bhushan acquisition

The news of Tata Steel’s winning bid for Bhushan Steel sent the shares of the latter soaring by over 12 per cent on Thursday. However, the proposed acquisition seems to have been factored in the stock price of Tata Steel already, as seen from the relatively muted reaction of its stock prices.

Tata Steel made a Rs 45,400-crore bid for distressed steel company, Bhushan Steel, which is undergoing proceedings under the Insolvency and Bankruptcy Code (IBC). According to research from Emkay Global, Bhushan Steel can generate EBITDA (earnings before interest, tax and epreciation) of Rs 50-60 billion. But, it believes that Tata Steel’s bid for Bhushan Steel is on the higher side compared to other competitors’ bid.

High debt levels

Tata Steel’s net debt stood at nearly Rs 76,000 crore as of December 2017. The debt level is expected to cross Rs 1 lakh crore after the proposed acquisition. It is to be noted that the proceeds of the recent rights issue made by Tata Steel will be used to repay up to Rs 9,000 crore of the existing debt by the end of the next financial year.

Synergy benefits

Bhushan Steel’s production capacity is 5.6 million tonnes and it has its plants at Sahibabad, Khopoli and Odisha. The Odisha plant, which is close to the Kalinganagar plant of Tata Steel, is expected to generate synergy benefits due to consolidation of its position in the east.

In addition to synergy due to the close location of the plants, Bhushan has an iron ore (key raw material) mine in Sundergarh, Odisha, which has a reserve of 92 million tonnes per annum. This will add to Tata Steel’s existing captive mines of iron ore at Jharkhand and Odisha and reduce the vulnerability of price movement of iron ore in the market.

Also, Bhushan Steel, which is mainly into the production and supply of flat steel products, has been a long-term supplier to renowned manufacturers in the automobile sector such as Maruti Suzuki, Tata Motors, Honda Cars, Mahindra & Mahindra and Ashok Leyland. This acquisition will complement the focus of Tata Steel on the automobile segment.

Tata Steel could also benefit from the location of Bhushan Steel’s plants at Mera Mandali and Khopoli, which are near major international seaports, Paradeep and Nhava Sheva JNPT, respectively. The plant at Khopoli, due to its proximity to the west coast of India, and the plant at Meramandali close to the East coast, would enable the company to capture the export market in African, West Asian, South-East Asian and Australian markets. This would allow Tata Steel to ship its products to the international markets with minimal inland transportation ,which reduces overall freight charges and time.

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