G Steel Plc's acquisition of convertible debt claims of Nakornthai Strip Mill Plc (NSM), making it the major shareholder in NSM, is a win-win deal, according to analysts.

Even though G Steel would have the burden of a US$120-million (Bt4.61 billion) loan and a 2.2 billion capital-increase shares issuance to finance the deal, the acquisition would be advantageous to both parties in terms of synergy, Ayudhya Securities analyst Natanee Savirasarid said yesterday.

The new shares to be issued by G Steel would create a dilution effect of about 16 per cent, she estimated, and the broker has lowered G Steel's fair value from Bt1.64 to Bt1.38 per share.

G Steel on Tuesday announced its intention to buy $180-million convertible claims from NSM's creditors, with a view to turning them into equity. G Steel will become NSM's major shareholder, with a 33-per cent stake, within 18 months.

Natanee said NSM would also benefit from the deal because its creditors would have greater confidence in its debt-servicing ability.

However, she said NSM had yet to be included in the broker's 'buy' recommendation list.

An analyst at Merchant Partner Securities said the deal would slim down the companies' production costs and sharpen competitiveness.

G Steel's debt-to-equity (D/E) ratio would be raised from 0.28 times to 0.42 after it borrows the funds and issues shares in exchange for buying the $180-million convertible claims from On City Holding.

The analyst also estimated that G Steel would have a 20-per cent dilution effect after it issues 2.2 billion shares. Its target price for the stock will also fall, from Bt1.98 to Bt1.60 apiece.

"As the current price has a 30-per-cent upside gain from the target price, we recommend a speculative 'buy' on the stock," the analyst said.

G Steel's costs from incurred interest will increase by Bt116 million in 2006 and another Bt470 million next year, Globlex Securities said in a note.

"Whether the deal is worthwhile depends on the benefits from synergy. We are reviewing their performance and studying the comments about the business outlook from executives," the research note said.

As the broker has maintained G Steel's sales predictions but increased its expense forecast by Bt116 million, G Steel's net profit this year is expected to fall from Bt2.34 billion to Bt2.22 billion. The broker has also cut its target price from Bt1.84 to Bt1.50 to reflect the dilution effect.

Both Standard & Poor's and Moody's Investors Service have negative views on the deal. S&P's put a credit watch on G Steel with negative implications, while Moody's placed G Steel's B1 corporate family rating and senior unsecured bond rating on review for a possible downgrade.

Siriporn Chanjindamanee

The Nation