Recent media reports suggest that Tata Steel has emerged highest bidder for acquiring Bhushan Steel, offering Rs 35000 crore and 12 percent stake to lenders and about Rs 1200 crore to the operational creditors
Last year in December, amid heated debate on valuation, Moneycontrol Research valued Bhushan Steel at about Rs 34,185 crore (based on economic value of assets). More recently media reports suggest that Tata Steel has emerged highest bidder for acquiring Bhushan Steel, offering Rs 35000 crore and 12 percent stake to lenders and about Rs 1200 crore to the operational creditors.
This comes as positive news for Bhushan Steel, whose shares were locked at 20 percent upper circuit at Rs 53.85 per share. If the bids are accepted, our calculations suggest that banks may have to take a hair cut of about 27 percent (see table) or 24.4 percent in case of 12 percent stake offered to bankers. That apart, bankers would also benefit on promoters’ pledged shares.
These assets at current realisations of about Rs 40,000 a tonne could produce an annual sales turnover of Rs 22400 crore and profit before interest and tax (PBIT) (Based on normalised FY13 PBIT margin) of about Rs 4700 crore (economic profit). Assuming Tata Steel goes for a 70:30 debt to equity (new structure) the value of new equity would be around Rs 10500 crore and based on potential normalised profits our calculations suggest a RoE of 16.66 percent after deducting for interest cost and tax, which is quite reasonable and profitable.
What in store for Bhushan’s investors?
If fresh equity is infused it will increase equity shares. At current market price, for Rs 10500 crore equity (assuming new 70:30 debt equity) infusion, the company will have to issue additional 195 crore shares taking its total equity shares count to 218 crore shares.
Based on the economic profit of Rs 4700 crore, EPS on the expanded equity works out to Rs 8 per share. Even at 10 times its earnings, the shares should be worth Rs 80 per share as against the market price of Rs 53.8 per share. However the larger picture is that this is still conservative. It does not reflect potential profits that could be from the capital work in progress, underutilised assets and common synergies. A large part of the capex was already done and which is why the Bhushan Steel earlier indicated that the company can expand its capacity from 5.6 million tonnes to 8 million tonnes at very nominal cost.
Tata Steel: costly affair?Post the news of Tata Steel emerging as highest bidder and the amount of bid was known to the street investors feared about the cost of the deal and financing of the same causing its shares to close lower by 5.8 percent on Monday’s trade. Barring acquisition cost and financing, which is yet to be known, acquisition should add value for Tata Steel providing ready capacity of about 5.6 million tonne value added steel which commands better realisations.