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To bid or not to bid
Recent commentary by Tata Steel’s management indicates that the company
has not yet decided on making a counter-bid for Riversdale. We consider a
counter-bid by Tata Steel as unlikely as it would reverse the focused balance
sheet de-leveraging process currently underway. Acceptance of Rio Tinto’s
offer for Riversdale has a higher likelihood but would require Tata Steel
getting comfort from Rio Tinto on coking coal supplies. We await more clarity
on Tata’s stance. Till then, O-PF stays.
Details of Rio Tinto’s bid for Riversdale
Rio Tinto has launched an all-cash offer for Riversdale Mining at A$16.0 valuing
the company at A$3.9bn (same as US$3.9bn). The offer is subject to minimum
acceptance of 50.1%. The bid has been recommended by all directors of
Riversdale except Tata Steel’s representative, who abstained from voting. The
recommending Directors and some institutional shareholders have provided Rio
Tinto with 14.9% of pre-bid acceptances. Tata Steel owns 24% in Riversdale. It
also owns 35% stake in Riversdale’s Benga coking coal project in Mozambique
with off-take rights to 40% of output at benchmark prices. Tata Steel’s economic
interest in the Benga project is thus 50.6%.
Will Tata Steel launch a counter-bid? – We think not.
Rio Tinto’s bid for Riversdale implies a value of US$930mn for Tata Steel’s 24%
stake as against the US$270mn it paid for it. However, CLSA’s Riversdale analyst
– Hayden Bairstow - values the company at A$18.0/sh, implying a valuation of
US$1.05bn for Tata Steel’s 24% stake. It is possible that Tata Steel might be
trying to get a better valuation for its stake and hence chose to abstain from
Riversdale’s board meeting. Tata Steel’s main interest in Riversdale was getting
access to coking coal supplies as a natural hedge to the coal that Corus buys.
Given that it has 35% stake in Riversdale’s Benga project, Tata Steel might
choose to tender its shares while keeping its coking coal supplies intact, though
with lower economic interest. We believe that a counter-bid by Tata Steel for
Riversdale is unlikely since it would entail an investment of upwards of US$3bn
(for 76% stake), which would add more debt to Tata’s stretched balance sheet.
We await more clarity on Tata Steel’s stance on Rio’s bid but lean in favour of a
positive outcome here, especially if Rio assuages Tata’s concerns on coking coal
supplies. A counter-bid also looks unlikely given that Tata Steel is planning a large
equity issuance in early-2011 (as per media reports). If the current price of
Riversdale Mining holds, our target price will go up by Rs30/sh. We maintain O-PF
on Tata Steel and await more clarity on this issue.
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