Riversdale's Takeover Battle: Win/Win for Tata Steel

by: World Market Pulse

The news of mining major Rio Tinto's (NYSE:RIO) $3.5 billion bid approach for Australia-based Riversdale Mining (OTC:RFLMF) not only sent the Africa-focused firm's shares surging up by a whopping 16%, it also set up a potential takeover battle, as the company has hard-coking coal projects in Mozambique that could eventually supply 5-10% of steel-making materials in the near future.

According to market speculation, Rio's rivals -- such as Vale (NYSE:VALE), Xstrata (OTC:XSRAF), Anglo American (OTCPK:AAUKY) and Peabody Energy (BTU) -- could also be interested in buying Riversdale after Rio's A$15-a-share approach valued the group at only 6% premium to its market value. Coking-coal exporter BHP Billiton (NYSE:BHP) is seen as a less likely contender, as it has its own growth options in Australia; Indian steel major Tata Steel (OTC:TATLY), which currently holds a 35% stake in Riversdale’s Benga project, is also not capable of a counter-bid, as the group's balance sheet does not support a counter-bid capability. Meanwhile, the company's fourth-biggest shareholder, Australian investment firm LinQ Management, expects Riversdale to be hotly contested, given the scarcity of good quality coking-coal assets and booming demand from China and India for the commodity.

Why a Riversdale Sale Is a Win/Win Situation For Tata Steel: Since RIO already dominates the iron ore markets, adding Riversdale's reserves of metallurgical coal in Africa would definitely help its steel industry plans -- but Tata Steel, India’s largest private-sector steel manufacturer, is also poised to make substantial gains. Currently Riversdale Mining (OTC:RFLMF) is controlled by a consortium of global steel companies including Companhia Siderurgica Nacional (NYSE:SID), Tata, and Wuhan Iron & Steel. Tata's 35% stake in Riversdale’s Benga project is through a joint venture with a 40% offtake agreement. The Benga project is among the two biggest ones that Riversdale has in Mozambique.

Analysts believe that Tata Steel is in a very advantageous position to negotiate an attractive exit price. “In the medium term, Tata Steel will get respite because if it goes ahead with the offer of Rio Tinto, $750 million in cash will come into the company,” said Ravindra Despande, steel analyst with international brokerage firm Elara Capital. Tata’s beverages firm, Tata Tea, had earlier profited by $523 million after it accepted a generous offer from Coca-Cola Co. (NYSE:KO) for its minority investment in Glaceau, the specialty water maker.

Analysts at JP Morgan meanwhile believe that any potential acquirer of Riversdale would not only provide an opportunity for Tata to monetize investments but also, given the Indian company’s stretched balance sheet, allow for de-leveraging -- and the event of a counter-bid would actually boost the value of the mine.

Tata Steel On a Shopping Spree: Driven by Asia’s huge demand for steel and iron ore, Tata Steel, ranked as the world's seventh-largest steel maker, is also looking at further acquisitions in order to boost its capacity to meet booming demand both at home and throughout the Asian region. Although last month the world's largest steel maker, ArcelorMittal (NYSE:MT), disappointed markets with its fourth-quarter profit estimate -- and Japan's Nippon Steel (OTC:NISTY) said it is likely to struggle to meet its full-year forecast -- Tata Steel has announced plans to raise up to $1.6 billion in additional capital to trim debt and invest in its European business, driven by impressive earnings for the September quarter.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.