Tata Steel plans to combine seven subsidiaries as part of a synergy effort.

In order to streamline operations and reduce costs, Tata Steel Ltd. on Friday announced the merger of seven of its subsidiaries with itself, including four publicly traded and three unlisted businesses.

The board of Tata Steel approved the amalgamation of Tata Steel Long Products Ltd (TSL), Tinplate Co. of India Ltd, Tata Metaliks Ltd, TRF Ltd, The Indian Steel & Wire Products Ltd, Tata Steel Mining Ltd and S&T Mining Co. Ltd.

Analysts said the merging simplifies the business structure and may provide synergy benefits and cut expenses, besides potential earnings accretion.

Tata Steel surged as much as 4.1% on the stock exchanges on Friday but pared much of the gains as the benchmark Sensex index plummeted over 1.73%. However, it still managed to close with profits of 0.55%.

Tata Steel will give 79 shares for every 10 shares owned by Tata Metaliks shareholders and 33 shares for every 10 shares held by Tinplate shareowners. The share swap at a 2% premium and 1% premium, respectively, look in favour of Tata Metaliks and Tinplate investors, said analysts at Anand Rathi Equity Research.

However, the share exchange ratio in Tata Steel Long Products, where Tata Steel is to give 67 shares for every 10 shares of Tata Steel Long Products (share swap at 7.8% discount), is in benefit of Tata Steel shareholders, analysts noted. TRF, where Tata Steel will give 17 shares for every 10 shares of TRF (share swap at 53% discount), is likewise in favour of Tata Steel.

Tata Steel will pay ₹426 per share to the shareholders of Indian Steel & Wire Products Ltd. Tata Steel Mining Ltd and S&T Mining Co. Ltd are completely owned units of Tata Steel.

Tata Steel has identified operational integration and better facility usage among the main positives that can produce synergy gains for the company with the amalgamation. Resources of merging firms can be pooled while the marketing and distribution networks of companies interact.

The optimization of logistical costs and improved raw material security may also result from the consolidation. Additionally, analysts predicted that following the merger, the businesses’ royalties on the purchase of iron ore would decrease dramatically.

Although it did not quantify or offer any particular advice on potential synergies, the company also mentioned the advantages that will result from effective working capital and cash flow management.

“We estimate 750 crore-800 crore of yearly savings, equity dilution of 2.2%, and possible earnings per share accretion of 1.5-2%,” said Jatin Damania, vice president of fundamental research at Kotak Securities Ltd.

According to Damania, the merger is a good step because it will streamline the corporate structure, stop additional royalty payments from leaking out on inter-company iron ore transfers, lower corporate overheads, give different businesses greater financial flexibility to advance with growth projects, and create additional operational, purchasing, and tax synergies.

The combination, according to analysts at another domestic brokerage, is the appropriate move for Tata Steel Ltd. It will enable Tata Steel in achieving structural and operational synergies throughout the whole steel value chain, including the forward integration into DI pipe, tinplate, and alloy steel, and it will also significantly lower the royalties that its companies must pay on the purchase of iron ore.

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