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Natsteel Holdings Asset Value

Does NatSteels NTA reflect its assets' market value? One of the most contentious aspects of the NatSteel management buyout (MBO) is whether management is offering too low a price, relative to NatSteels NTA, that makes the proposed deal unfair to minority shareholders.

So is NatSteels NTA overstated relative to its market value? According to NatSteels annual report, at Dec 31, 2001 the company had stocks worth $200 million, receivables and prepayments of $427 million, property, plant and equipment of $586 million, investment properties of $15 million, investments in associated companies of $355 million and long-term investments and receivables totaling $60 million. In total, the book value of the physical assets amounted to some $1,643 million. In addition, NatSteel had cash of $201 million and liabilities of $774 million. Hence, NTA worked out to some $1,070 million. It should be noted that during 2001, NatSteel wrote off $93 million of its fixed assets and made provision for some $70 million in the diminution in value of investments in subsidiaries, associated companies, long-term investments, investment properties and impairment of fixed assets. The write offs totaled $163 million. And since December, NatSteel has announced the sale of its 67 percent owned subsidiary NatSteel Brasil for $261 million cash, giving it a gain of $73 million. This suggests that NatSteel sold Brasil at 1.4 times its book value of some $188 million. Last month, it announced the sale of Ned Broadway for $337.2 million cash at 3.4 times book value. Therefore, the value of NatSteel Broadway carried by NatSteel was about $99 million.

Removing the NTA of Brasil and NatSteel Broadway from the group's NTA at end-December and adding back the cash receipts would make NatSteels NTA after the two transactions $1,382 million, assuming no other major transactions took place. The latest numbers given by Crown Central Assets Ltd, the vehicle set up by NatSteel management to take over NatSteel's remaining business, suggests that NatSteel now has net cash of $375 million. This would mean NatSteels physical assets have a book value of some $1 billion. Even if we assume further write-downs of up to 30 per cent are necessary, the MBO offer price is some 60 per cent below NatSteels NTA. Meanwhile, a comparison of NatSteels depredation policy and the net book value of its assets versus its global competitors suggests that NatSteel is rather conservative in its approach. On average, it depreciates its fixed assets over 12 years. The average age of its assets is now six years. This compares with Korea Posco's average fixed-assets depreciable life of 20 years, and average age of 12. China's Maanshan Iron and Steel has fixed assets with an average age of 6.1 years and an expected life of 20 years. The corresponding figures for America's Nucor are 8.2 and 15 years, Anglo-Dutch Corus Group 15 and 23 years and Germany's Thyssenkrupp 8.2 and 16 years. All in all, based on NatSteels aggressive write-down of its asset values and shorter asset-depreciable life compared with its peers, one can infer that the book values of its assets are not significantly over-stated. The actual worth of the assets, however, will depend on the future cash flows these assets can generate over their remaining life. On this, we can draw comfort from managements comments that the steel business is expected to return to profitability this year.