Tata Steel's plan to merge Metaliks hits shareholder wall

Rs Tata Steel’s efforts to merge with itself Tata Metaliks, its listed 50% subsidiary, have kicked up a storm among some of its large minority shareholders. They have questioned the rationale of the move at a time when investments are being made to turn around the operations of the pig iron maker.

Investors led by Patton International, which holds 1.37% in Tata Metaliks, have demanded the merger be either called off or deferred till the cost-saving investments like setting up a sinter plant, a coke oven battery and a captive power plant using waste heat positively start showing results.

“There is dissent against this merger and it is right time to at least defer if not call off the proposal. At a juncture when investments being made to revive operations, going for a merger is something which must be reviewed,” Sanjay Budhia, managing director of Patton, said at the annual general meeting of Tata Metaliks.

Though the merger was announced in April, Tata Steel is yet to take follow-up steps like getting shareholders’ approval and filing documents with the court to effect the proposal, Koushik Chatterjee, chairman, Tata Metaliks, who is also Tata Steel Group’s finance director, told the shareholders.

In his attempt to mollify the shareholders, Chatterjee said the merger was the last option available to revive Tata Metaliks whose business model has gone for a toss following a steep rise in coke and iron ore prices during the commodity boom.

“The merger has been proposed to ensure long-term sustainability of the business. Input costs inflation has been just too high for the product we manufacture. Since 2008, because of the consolidated nature of iron ore and coal industry, which behave like oligopolies, need for captive supplies is critical for iron and steel making. With a rise in Chinese demand, prices of coal and iron ore had appreciated by anything between 2-3 times which has squeezed out margins of non-integrated players,” Chatterjee said.

Kumar Gautam, a major shareholder with a family holding of close to 1%, too does not see any logic. “When raw material prices are much lower and steps like setting up a sinter plant to utilise iron ore fines are being taken to significantly cut costs, merger doesn’t make sense,” he said.

“The coke conversion plant would be set up under the build-own-operate model as soon as the environmental clearance is received. Also, a 10 mw power plant based on waste heat recovery would be built which will increase self-reliance on coke and power. Both these projects are expected to come by the end of FY14,” Chatterjee said.