Neutral
TISC.BO, TATA IN
Rio's bid for Riversdale- Very Positive for TATA given
~24% stake in Riversdale (Rs38/share on initial bid) -
ALERT
• Rio’s bid for RIV- Takeaways from J.P. Morgan Australia Resources
team: The key thoughts of J.P. Morgan Australia Resource team on Rio’s bid
for RIV (please see note ‘Talks with Riversdale Mining, dated 6th Dec, 2010
for more details) are: ‘a) Speculated price equates to only 6% premium to RIV's
closing price (48% premium to the 3-month average price). Given RIO’s
financial and operational capabilities would de-risk project execution, RIV
shareholders are unlikely to settle for any offer that does not reflect the
entire currently recognized resource base, in our view; b) RIV has three
cornerstone shareholders: steelmakers Tata Steel (24.1% of RIV and 35%
of Benga project) and CSN (13.2%) and financial investor Passport Capital
(13.3%) which could make an attempted takeover slightly more
challenging; c) In our view, the attraction is the resource, rather than the project
as it stands. As we have pointed out in our commentary on Riversdale, the key
hurdle in project development is infrastructure and the current plan of barging
looks challenging, particularly as tonnages rise; d) We believe the likelihood of
a counter-offer emerging from somewhere as high; e) While Riversdale’s
statement confirms that talks are at a very early stage, this news is not surprising
in our view. Investors may have concerns around the execution risks associated
with RIV, but there is little doubt that the resource is world-class in nature and
therefore would sit comfortably within RIO’s portfolio. Having said that, a
number of other companies would no doubt feel the same, implying a high
likelihood of a competitive bid situation emerging in our view particularly
given the current tightness of the coking coal market and the highly
concentrated nature of the supply side’.
• Implications for TATA: We view the bid for RIV as very positive for TATA
and validating the investments that TATA has made in RIV. As of now with
TATA’s ~24% stake in RIV and 35% stake in Benga project combined with an
offtake agreement for 40% of Benga’s coking coal out put, means it is well
positioned to benefit from any increase in value of RIV. TATA’s 24% stake
would be valued at $840mn at the current bid price (Rs38/share), and as the J.P.
Morgan Australian Resource team believes a counter bid is likely which should
be even more positive for TATA. The carrying value in TATA's balance sheet
was $232mn for the 21% stake (it acquired the remaining this year via through
market purchases).
• Dilemma for TATA: Short-term monetization v/s Long-term coking coal
security: We believe the propose bid for RIV creates a dilemma for TATA. Any
potential acquirer for RIV would provide an opportunity for TATA to monetize
investments and given the stretched balance sheet it would allow de-leveraging.
However, given the long term tightness in coking coal and the strong resource
base of RIV, the investment does provide a large degree of coking coal security
for TATA.
• A potential counter bid from TATA for acquiring more stake in RIV?: We
believe TATA’s balance sheet lacks flexibility for a meaningful counter bid .
