July 06, 2006 | The Economic Times

Tatas to hike Tata Steel stake to ward off takeover threat

The Tata Group will increase its stake in Tata Steel by about 7% through a preferential issue of shares to ward off possible hostile takeover threats, chairman Ratan Tata said on Wednesday. "The steel industry is highly fragmented and considerably vulnerable. The only safegurd is to increase the founding family's stake over time," Mr Tata told the shareholders of Tata Steel. The Tata Group's holding in Tata Steel, now at about 27.48% will rise to about 33.6% by the end of the current financial year, said Mr Tata.

"Given the right price, investors have a right and privilege to sell their stakes in the company. The increase in stake is to ensure that management control remains with the promoters," Mr Tata said. Mr Tata's statement comes just days after global giant Mittal Steel clinched a deal to acquire Arcelor, ending a bitter six-month long battle. Mittal Steel has always expressed its desire to acquire companies in China and India. India, Asia's third largest economy, is seen as a major steel producing hub.

Adequate raw materials and growing consumption - demand climbing 7% every year - make it one of the most attractive steel producing nations in the world. Lakshmi Mittal has already announced his plan to build a 12m tonne steel plant in Jharkhand and compete with Tata Steel in the domestic market. In a bid to avert hostile takeovers, the Tata Group is set to hike its holding in Tata Steel by 7%.

Tata Steel, India's largest private steel company, has a total capacity of over 5m tonnes which is likely to go up to about 8m tonnes, once an ongoing brownfield expansion at the company's existing plant site at Jamshedpur, gets completed. The Tata family holding in the company has been traditionally low, making it the focal point of speculation about possible hostile takeover bids. At one point, Pilani Investments, the Birla group holding company, had a higher holding of about 8% than the Tata Group.

Things began changing in 1996 when the group doubled its stake in Tata Steel to about 14.8% through the issue of naked warrants. Steady annual purchases from the market has seen the stake rise to about 26.79% currently. A low share price in the late 1990s and in the early years of the 21st century (when the company was going through a painful reorganisation) also helped. Tata Steel's 10% preferential allotment to Tata Sons will be done in two tranches of 5% each over the next two years. Tata Steel had earlier said that it plans to raise Rs 6,500 crore for funding its future plans.

The issue of 2.7 crore equity shares at a price of Rs 516 a share will allow the company to raise up to Rs 1,393 crore in the current financial year, Mr Tata said. The rest will be raised from the foreign market through debt, said company officials. The sale of 2.85 crore warrants would raise another Rs 140 crore in this year. The final amount would be dependent on the share price prevalent at the time of exercise of the warrants, which cannot be more than 18 months from the issue of the warrants.

Though many Indian business families prefer a higher holding, some key companies listed on the stock market have very low promoter shareholding. Hindalco, Grasim, Bajaj Auto and Mahindra & Mahindra are prime examples. Hostile takeovers have also been a rarity in India. In the late 1990s, India Cements fought a bitter battle to wrest control of fellow South-based cement company Raasi Cements, while Sterlite Industries' bid for Indal failed after Canadian giant Alcan's defence strategy succeeded.

Indian families have tended to rely on decades of public trust, large institutional holding, better performance and a general distaste of hostile takeovers to stub out the aspirations of any predator. Though there are little indications of things having changed, analysts said Mr Tata and the Tata Group must be attempting to pre-empt any potential bidder. Mr Tata's statement on increasing the promoters' stake could also be viewed against the background of the dwindling stake of retail shareholders, while institutional holding has been on the rise.

According to information with the BSE, retail shareholding in Tata Steel, as of March 31, '06, has come down to 24.8% from 26.9% in December, '05. Institutional holding, on the other hand, has gone up to 43.3% from 40.9% in the same period. Tata Steel shares rose 5% to Rs 563 on Wednesday. Mr Tata also added that once the other projects become operational, Jamshedpur would no longer be the hub of steel making for Tata Steel. It would, however, always remain the 'heart of the company'. India has become a vital target for global steel makers mainly due to abundant iron ore reserves.

Last year, Korean major Posco announced its plan to build a 12m tonne steel plant in Orissa. Recently, Japan's Nisshin Steel Company said it was considering setting up a steel plant in India to meet demand from Asian carmakers.