SMALL INVESTORS’ WELFARE ASSOCIATION
The Tata Steel - Bhushan Steel merger EGM today; March 26:
SHAREHOLDERS
SHOULD VOTE AGAINST THE RESOLUTION FOR MERGER
1) THREE YEARS FOR COMPLETION: The likely completion of the merger will
happen in May 2021, literally on the third anniversary of the announcement of
Tata Steel as the victorious bidder in NCLT. Three years ? For a company the
stature of Tata Steel ?
2) THE SHARE SWAP RATIO: Interestingly, BSL performance has zoomed in recent
quarters, what with the wheels of fortune smiling again at the auto industry
(BSL is the country's leader in auto grade steel). Based on the latest
annualised quarterly results, the BSL shares are currently quoting at a PE of
less than 2 times pegged to the share swap ratio (1 share of Tata Steel to be
allotted against 15 shares of BSL), while Tata Steel shares are trading at a PE
close to double digits. So the question shareholders are naturally asking, "is
the share swap ratio fair to BSL shareholders ?"
3) THE RATIO WAS DECIDED THREE YEARS BACK: The author justified the ratio in
his mind thinking that it is unfair to see today’s performance, probably the
valuation was based on 2017-18 financials when BSL was showing losses (has been
under SFIO investigation for some time now) and the Singhals were cooking their
books to stay afloat and solvent and Tata Steel was their white knight in
shining armour. So for academic interest, he decided to dig out the Valuation
report and Fairness opinion of 2018-19 and was in for a shock.
4) THE VALUATION
REPORT: The fairness report simply says that the valuation is fair basis
Valuation report, Scheme documents etc. So it all boils down to the Valuation
report, which describes four methods:
(a) Income Approach: not considered by
Valuer as Tata Steel did not provide its projections
(b) Cost Approach:
not considered as historical coat of assets for a loss making company “has
limited relevance in valuation of a business as a going concern”.
c) Market Price
Method: Average of last six months monthly average prices (VWAP) which
concludes 1:15
(d) Market Price
Method II: Comparable Companies Method where EV/Ebitda of comparable companies
is to be considered. Then strangely, instead of comparing the EV/Ebitda of BSL
with that of other comparable companies, it simply takes Enterprise Value of
BSL, reduces liabilities (including preference shares) etc. and divides by no
of shares to justify result of c above. So much for comparing valuation of
similar companies. How could Tata Steel accept this, float it to the stock
exchanges and file its merger scheme basis such a glaring error ? But we guess,
when your reputation of governance is as strong as Tata Steel, you can get away
with murder.
WHAT DO SMALL
SHAREHOLDERS DO ? We do not question the buyout of BSL by Tata Steel, that is
done and BSL is now 72%+ owned by a WOS of Tata Steel and that is fine.
However, why short-change BSL existing shareholders? Let BSL continue as a
listed entity, its share is worth well over Rs. 100 (December quarter EPS is
Rs. 8.35 i.e. Rs. 33.40 annualised EPS).
The court convened
shareholder meeting is today, March 26 2021 at 3pm and e-balloting has already
started. Majority of the minority has to approve (Tata group cannot vote).
Should shareholders not vote for continuing BSL as an independent step down
listed subsidiary of Tata Steel ? After all, it does not prevent Tata Steel
from leveraging synergies; after all we have so many examples of parent and
subsidiary both being listed (Birla’s, Vedanta..... and even Tata’s
SHAREHOLDERS SHOULD
DEFEAT THE PROPOSAL FOR MERGER TODAY.
