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Tata steel merger: Don’t go by latest share price, says MD TV Narendran

Tata Steel’s decision to merge seven group companies with it, announced on Friday, was the culmination of months of planning and two dozen board meetings on Thursday that ran well beyond midnight, according to TV Narendran, the steelmaker’s managing director. Narendran tells Nehal Chaliawala and Satish John that the share-swap ratios were arrived at after following all due processes and that there are long-term benefits for all parties involved. Edited excerpts:


What was the rationale behind this merger and the timing of it?

We had anyway planned to simplify our structures. We said some time back that we will have clusters and at that point in time we were thinking of merging (Tata) Metaliks with (Tata Steel) Long Products. Then the acquisition of Neelachal (Ispat Nigam) happened, which is under Tata Steel Long Products, so long products became big in itself. And then we have this EAF (electric arc furnace) facility coming up in Punjab, etc. So, given the size and scale of some of these businesses and the fact that for growth they would need support from Tata Steel, it made sense to merge them. And then we said if we are doing it, let’s do it all at once. It simplifies the structure below the parent significantly and also brings in synergy onto the table.

What kind of cost savings and synergies are you looking at?

There are multiple areas. Firstly, even in terms of governance simplicity, a lot of management time gets saved because you’re no longer running so many listed subsidiaries. The second part is, of course, access to capital, engineering and project capabilities. Then the corporate structures get reduced, and a lot of the corporate costs can get shared. The third area is procurement related. The smaller companies can plug into Tata Steel’s vendor base. Tata Steel itself can benefit from a more extended value chain. Between Tata Steel Long Products and Tata Metaliks, they run a similar kind of smaller blast furnaces. So, a lot of operational synergies we can derive out of that.Then there are revenue leakages because the MMDR (Mines and Minerals Development and Regulation) Act was changed. Earlier you could supply iron ore to your subsidiaries from your captive mines, but now the royalty rates are different even for subsidiaries. So, there’s leakage just because your structure is like this which will now be avoided.

Share prices of the merging companies fell sharply. How do you address the concerns of the minority shareholders?

We obviously followed a proper process. We had a set of people from Tata Steel Europe and for each of those subsidiaries, we had a different set of people – the valuers and transaction advisors and everything else. They worked independently of each other. Before we went to the Tata Steel board, we went to each of those individual boards and their independent directors. They had conversations with the assessors, valuers, etc. They were comfortable with the ratios that were being offered. And then they recommended to their respective boards, who agreed (to the proposal). And then we went to the Tata Steel board. The Tata Steel board also had to look after the minority interest of the Tata Steel shareholders. So, each board went through the process and comforted themselves with the fairness of the share swap ratios recommended. In some of the companies, we saw that the share price has been going up for the last few days. You shouldn’t go by latest share price, but you should go by what is average over a period as per Sebi guidelines.

What would be Tata Sons’ stake in the merged company?

There is a small dilution; I think it (dilution) is in the region of 0.7%.

Will employees lose jobs due to redundancies created by the merger?

We recently went through this exercise for Bhushan, so we have a way of assessing the jobs that are required. There are also fitment issues when you merge the companies. There are union issues. So, there are different ways in which we deal with it. If there are redundancies, given that Tata Steel is growing, they will get opportunities to grow in other parts of Tata Steel, which is what happened in Bhushan also. There were more people there than we needed to have once we merged, but most of them got opportunities in other parts of Tata Steel. We may also do an assessment and find that some people don’t make the cut. So, we will take that call over the next one year as we get into detailed assessments.

Does this conclude the simplification process at Tata Steel?

I would say this is a big part of the simplification. After this, Tata Steel will not have any listed subsidiaries. We will still have big subsidiaries or important subsidiaries, like Tata Steel Utilities and Services which runs a town. We have a lot of joint ventures, but they will be there because they are JVs. Then there is Neelachal, which we are not supposed to merge for at least three years as per the bid documents. So that way, a big part of the simplification is done, but there’s always more work to do.



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