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Riversdale stake sale-not a bad decision at all
Tata Steel sold its entire 26% stake in Riversdale Mining Ltd for AU$ 1.06 bn
(US$1.1 bn) resulting in a return on investment of 100%. However, TATA continues
to hold its 35% stake in the coal asset in Mozambique as a strategic investment.
Although this stake sale in Riversdale is contrary to the management’s earlier stance
of holding it as a strategic investment, our view is that it will enable the company to
raise the much-needed cash to fund its large capex plan or to lower its existing debt.
We maintain our BUY rating with a target of Rs735/share.
v Stake sale in parent company not to affect interest in the coal asset: Tata Steel’s
decision to sell its entire stake in the Riversdale parent company to Rio Tinto does
not impact its interest in the Riversdale Coal Mining asset in Mozambique (Benga
Project). It continues to maintain its 35% stake in the Joint Venture Company and
40% off-take arrangement for the coal mined from the Benga Project.
v Two pronged strategy: In our view, the decision to sell out of Riversdale parent
company is a two-pronged strategy enabling TATA to 1) raise US$1.1 bn which can
be used either to fund its huge capex plan or reduce the leverage on its balance sheet
and 2) maintain its hold over the strategic coal asset while not subjecting itself to
being a minority stake holder in Riversdale under complete dominance by Rio (by
virtue of its 73% stake). According to the management, Rio had indicated its intent to
delist Riversdale and it was in the best interest of TATA to sell out its stake in the
absence of any agreement/ joint venture with the majority owner (Rio Tinto).
v Money to be used for capex/lowering debt: According to the management the
funds raised will be used to lower debt or fund its capex requirement. Tata Steel had
a consolidated net debt of US$10.5 bn as at end-FY11. In our view, if the entire
proceeds were to be used to repay debt, debt-equity and net debt-to-EBITDA would
improve to 1x and 2.5x from 1.1x and 2.9x currently. Tata Steel intends to spend
US$2.2 bn over the next two years on capacity expansion at Jamshedpur, green-field
expansion in Orissa, investments in raw material projects and US$650 mn of
investments in Europe
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Riversdale stake sale-not a bad decision at all
Tata Steel sold its entire 26% stake in Riversdale Mining Ltd for AU$ 1.06 bn
(US$1.1 bn) resulting in a return on investment of 100%. However, TATA continues
to hold its 35% stake in the coal asset in Mozambique as a strategic investment.
Although this stake sale in Riversdale is contrary to the management’s earlier stance
of holding it as a strategic investment, our view is that it will enable the company to
raise the much-needed cash to fund its large capex plan or to lower its existing debt.
We maintain our BUY rating with a target of Rs735/share.
v Stake sale in parent company not to affect interest in the coal asset: Tata Steel’s
decision to sell its entire stake in the Riversdale parent company to Rio Tinto does
not impact its interest in the Riversdale Coal Mining asset in Mozambique (Benga
Project). It continues to maintain its 35% stake in the Joint Venture Company and
40% off-take arrangement for the coal mined from the Benga Project.
v Two pronged strategy: In our view, the decision to sell out of Riversdale parent
company is a two-pronged strategy enabling TATA to 1) raise US$1.1 bn which can
be used either to fund its huge capex plan or reduce the leverage on its balance sheet
and 2) maintain its hold over the strategic coal asset while not subjecting itself to
being a minority stake holder in Riversdale under complete dominance by Rio (by
virtue of its 73% stake). According to the management, Rio had indicated its intent to
delist Riversdale and it was in the best interest of TATA to sell out its stake in the
absence of any agreement/ joint venture with the majority owner (Rio Tinto).
v Money to be used for capex/lowering debt: According to the management the
funds raised will be used to lower debt or fund its capex requirement. Tata Steel had
a consolidated net debt of US$10.5 bn as at end-FY11. In our view, if the entire
proceeds were to be used to repay debt, debt-equity and net debt-to-EBITDA would
improve to 1x and 2.5x from 1.1x and 2.9x currently. Tata Steel intends to spend
US$2.2 bn over the next two years on capacity expansion at Jamshedpur, green-field
expansion in Orissa, investments in raw material projects and US$650 mn of
investments in Europe
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