Investors worried as Tata Steel looks set to acquire Bhushan Steel

21 Feb 2018


Tata Steel has reportedly put in the highest bid for Bhushan Steel and is likely to emerge as the final choice for acquiring the Delhi-based company that is under insolvency proceedings at the National Company Law tribunal (NCLT) now.

News reports indicate Tata Steel is offering an upfront payment of Rs35,000 crore for Bhushan Steel for its financial creditors and Rs17,000 crore for Bhushan Power, which adds up to Rs52,000 crore. Along with payments to operational creditors and working capital loans, the amount may increase to Rs69,000 crore.

The bid amount translates to a haircut of 38 per cent for the lenders of Bhushan Steel and 63 per cent for Bhushan Power's lenders, while for Tata Steel it would be one of the largest acquisitions the group has made in recent years.

Investors, however, fear that Tata Steel may be biting off more than it can chew, especially with the Rs35,000-crore offer for Bhushan Steel Ltd.

Tata Steel had earlier stretched its finances to acquire Corus Plc, which turned out to be a grossly expensive acquisition, as after several restructuring attempts and asset impairment write-offs, it is still stuck with huge loans (See: CSN blinks at 603p, Tata Steel bags Corus for $12.11 billion).

The Bhushan Steel deal comes at a time when Tata Steel is in the process of moving its European operations into a joint venture with German's Thyssenkrupp AG. Any increase in Tata Steel's borrowed capital is likely to unsettle investors.

Beyond the upfront amount and related payments, the acquisition would put fresh financial burden on Tata Steel. The full transaction structure will give a better picture of what Tata Steel has offered, and what it is asking for in return. Creditors may offer Tata Steel favourable debt refinancing terms.

However, Tata Steel could largely benefit from an additional 7.9 million tonne annual capacity, including Bhushan Steel's steel capacity is 5.6 million tonnes and Bhushan Power's 2.3 million tonne plant. Both companies are also implementing expansion plans (including allied activities such as increasing captive power capacity) for their steel operations.

Together with Bhushan assets, Tata Steel would have a combined capacity of nearly 26 million tonnes

Also, since both the Bhushan plants are in Odisha, where Tata Steel's new steel plant is also located, the acquisition will offer locational advantages and throw up opportunities of rationalising costs across functions, and even higher operating efficiencies.

Meanwhile, Tata Steel is planning a restructuring of its capital, which should help ease the burden of this transaction.

A rights issue is under way to raise Rs12,800 crore and once the European steel business moves to a joint venture with Thyssenkrupp, the debt related to this business will also be lower. That should give Tata Steel breathing room for the increase in debt because of these acquisitions.

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