Tata Steel UK on Block, Tough Search for Buyer

Brokerages claim exit plan good; unions call for nationalising business

Tata Steel has put its entire UK business on the block, putting thousands of jobs at risk amid a deepening crisis in the sector. But finding a buyer could be difficult.

Brokerages are of the view that the unit — which has reported negative Ebitda (earnings before interest, taxes, depreciation and ammortisation) for the last two years and with significant capex on its books — will find it difficult to get a buyer, without support from the UK government.

ALSO READ: India Inc loses billions in foreign buys

After a marathon meeting, which went on till late Tuesday night at its Mumbai headquarters, Tata Steel — the flagship company of the $100-billion (Rs 6.6 lakh crore) conglomerate — announced its intention to sell its UK business early on Wednesday morning.

Jolted by the decision, labour unions called for nationalisation and the UK government authorities have assured nearly the 17,000 workers at the company plants across the country that all options would be explored to safeguard their interest.

ALSO READ: Unfair to say decisions in 2007 were incorrect: Koushik Chatterjee

UK Business Minister Anna Soubry said the government was prepared to look at all options to allow time for a buyer to save thousands of jobs. When pressed, she said there was a limit to what the government could do: “We have to be very careful because we have these state aid rules, which have been established for well over 50 years.”

Experts are of the opinion that Tata Steel has made the right decision but finding a buyer would be tough in the current market.

“Directionally, Tata Steel has made a right move as further investments towards these assets will stop. But to find a buyer in the current market is going to be challenging and remains to be seen,” said Pritesh Jani, senior analyst, Religare Securities.

Tata Steel UK division (flats and long) has a capacity of 10.5 million tonne and has churned volumes between 7.4-7.6 million tonne in FY14 and FY15.

Since the last couple of years, its Ebitda per tonne has been negative at $12 (Rs 792) and $37 (Rs 2,442), respectively.

Alongside, these operations have capex spends at $230 million tonne per annum.

“Looking at the kind of investments the new buyer would have to make to bring this division on to its feet amid the prevailing grim market conditions. The company may land up selling this business at nil enterprise value per tonne,” said an analyst with local brokerage.

“A buyer will come only if there is strong government support for this plant, else to buy this loss-making unit. which employs nearly 12,000 workers (directly and indirectly) makes no sense,” he added.

Brokerages were of that view that had the sale included even the Netherlands operations (7 million tonne), chances would have been bright for Tata Steel to sell off the divisions since Netherlands earns healthier Ebitda.

Nevertheless, complete divestment of UK operations would be positive for Tata Steel overall as cash burn would reduce and only profit making Netherlands portfolio would be left with Tata Steel Europe, said brokerages.

There is no specific debt on UK business but the overall long-term debt on European operations is about Rs 25,000 crore which is about 30 per cent of the consolidated net debt of about Rs 75,000 crore, Koushik Chatterjee, group executive director (finance and corporate), said at the press conference held in Mumbai on Wednesday.  He also said the company is engaged in dialogue with the UK government regarding this asset sale but did not mention of the latter having promised any concrete support.

“We really appreciate the support we have received from the UK government since the last few months. Talks with the UK government have been open and transparent and we (Tata Steel and the UK government) working together to find a solution to this,” said Chatterjee.

Alongside, since there has been cash drain at Tata Steel UK unit, the company is of the view that execution of this asset sale has to be time-bound. Chatterjee, however, did not specify the timeframe the company is looking at to get this asset off its back.

Cumulative investment at the UK operations since the time of acquisition has been about two billion pounds mainly comprising capex and working capital, informed Tata Steel.

“Most impairment on the UK unit has already been taken and hence the book value of the asset it very nominal,” said Chatterjee.

Tata Steel also informed that discussions with Greybull for sale of its UK long product business will also continue and that the UK government is also involved in the discussion.

Tata Steel has been trying to get the 4.5 million-tonne long product unit off its back for quite sometime now with its first attempt with Klesh Group having failed last year.

“Sale of this long product division will be sooner,” informed Chatterjee.

“We would like to wait for the final outcome of the sale and believe that any sensitivity analysis on likely benefits emerging from a complete sale at this point of time would be futile as how the deal would be structured and executed (if at all) remains highly uncertain,” said Abhisar Jain, senior analyst with Centrum Brokerage.

Tata Steel had acquired Europe operations of Corus for a hefty £6.2 billion in 2007, a move that made it the world's fifth largest steel producer.

Tatas had entered the British steel sector, which once dominated the British economy, in early 2007 with acquisition of Anglo-Dutch steelmaker Corus after a fiercely fought takeover battle with Brazilian rival CSN. Till date, it remains the biggest ever overseas acquisition by an Indian group.

END OF THE ROAD With the Tatas confirming the sale of Tata Steel UK, a 10-year-long tumultuous journey will come to an end 2007: The acquisition Apr 2007: Corus — formed by the merger of British Steel and Koninklijke Hoogovens —acquired by the Tata group for $12 billion (about Rs 50,000 crore then) 2008-2010: Financial crisis: With the global economic meltdown, and declining demand for steel, the acquisition did not work out too well 2009: Mothballing Teesside Cast Products, after the unexpected cancellation of a 10-year contract with Marcegaglia, Italy. Work force cut by 1,700 2010-2015: Troubled times 2012: Tata Steel Europe announced job cuts for 900 in the UK

Reference - http://www.business-standard.com/article/companies/tata-steel-uk-on-block-tough-search-for-buyer-116033000266_1.html