India's foremost steel company Tata Steel has announced plans to buy NatSteel's Asian steel business from the Singaporean company. Under the terms of the deal, the steel business will be transferred to a company called NatSteel Asia, the equity of which will then be sold to Tata Steel.
NatSteel Asia has a negotiated enterprise value of some S$486 million and after some adjustments based on changes to the balance sheet, the purchase price will be around S$466 million. Completion is scheduled to take place in February 2005 and Tata will pay for the company in cash.
The assets being sold through NatSteel Asia include eight operating companies in Singapore, four in China, three in Australia, three in the Philippines, two in Malaysia and one each in Thailand, Vietnam and Indonesia. They comprise mills, wire makers and trading.
The sale price represents 14 times NatSteel Asia's 2003 after tax profits of S$32 million. This means the deal is accretive for NatSteel shareholders whose shares are trading at around 9.5 times earnings. However NatSteel's steel businesses also had revenues of S$1.416 billion in 2003, according to Bloomberg data. Thus the sales price counts as 33% of one year's revenues. This seems low but is explained by the fact that a lot of the revenue comes from the trading side of the business where the margins are much lower. Thus while this deal will be accretive to Tata Steel's earnings, it will actually dilute its margins. These margins are higher than those at NatSteel due to less reliance on trading.
For NatSteel the move clearly marks their view that we are nearing the top of the steel price cycle. In the last few years most of the increase in revenues has come about from an increase in prices, rather than an increase in volumes. Thus management felt that now was the right time to cash out.
"This sale represents a good opportunity to enhance value for shareholders at a time when we have benefited from the upcycle in the steel industry in the last two years," says Cham Tao Soon, chairman of NatSteel. "After careful consideration, the board is pleased to support this transaction and recommend this for shareholders to consider. The steel businesses of Tata Steel and NatSteel have a strong strategic fit and synergies."
It is unclear at the moment what NatSteel will do with the money. According to the company it is looking at a number of options, including paying down debt, developing its non steel operations in its industrials and chemicals divisions, and perhaps making a distribution to shareholders.
It is likely that the company will have more detailed proposals ready for shareholders at the EGM, which will be called before the end of the year. NatSteel's current owners are 98 Holdings (Ong Beng Seng, GEMS and Standard Chartered) with 51%, Oei Hong Leong with 29% and the public with 20%. All shareholders will be allowed to vote, suggesting that this is perhaps a done deal.
Questions could be asked about whether Tata's offer is really the best offer there is. NatSteel and its advisers Goldman Sachs have not sought other bids for the assets. They are said to be comfortable with the deal on the table, preferring not to unleash the full force of a bidding contest on the company.
For Tata, the deal represents a chance to get a strong foothold into east Asia, where so far it has little presence. The assets it is buying will add 33% to its annual revenues (if they earn the same in 2004 as they did in 2003). There are thought to be few if any overlaps between the two companies and thus much scope for expansion without cost cutting.
"The acquisition of the steel businesses of NatSteel is an important step in Tata Steel's plans to build a global business," says B. Muthuraman, managing director of Tata Steel. "NatSteel's steel business provides Tata Steel access to key Asian steel markets including China."
One strange aspect of the deal was that Tata Steel was advised by Standard Chartered, which is also one of the selling shareholders. This kind of conflict might look strange to the shareholders of Tata Steel and NatSteel and could explain why no other bids were being sought.
Another slightly more sinister aspect of the deal is the run up in the share price of NatSteel towards the end of last week. The volume of shares traded in NatSteel on Friday was 306,000 - roughly ten times the daily average in the weeks and months leading up to the deal. The share price also rose nearly 8% last week. It looks as if news of the deal had been leaked. It is understood that the SGX and MAS will be looking into who was buying the shares.
Perhaps the unsung hero in all this is Ang Kong Hua, the ex-President of NatSteel. His aborted MBO bid for the company's steel assets in 2002 really got the company and its new shareholders thinking about how to extract the most value out of its steel operations. If he had succeeded in his bid to buy the steel assets, this is probably exactly the kind of exit he would have looked at. Ang retired earlier this year.