 "How Tata Steel benefits from selling its European units: All you need to know")
What will Tata Steel be selling?
Under a memorandum of understanding, Tata would sell UK-based assets including Scunthorpe Steelworks, mills in Teesside, Dalzell and Clydenbridge in Scotland, as well as operations in France and Germany, if a final deal is struck with Switzerland-based Klesch Group.
The steel maker is offloading its long products division which manufactures products forthe construction and engineering industries like bars, rods, wires, structural shapes, tubes and rails.
Are they exiting European operations completely?
No. Tata Steel’s European operations chief Karl Koehler has said that they would like to focus on other areas of steel manufacturing.
“We have decided to concentrate our resources mainly on our strip products activities, where we have greater cross-European production and technological synergies,” Koehler said.
The stripped products manufactured by Tata include sheet steel for domestic appliances, the automotive sector and consumer electronics. A BBC report notes that the plants manufacturing these products are primarily in South Wales and the Midlands and Tata Steel’s specialty steel business in South Yorkshire supplies steel for the auto and aerospace industries.
Why Tata Steel is offloading the European business
In all likelihood it is because the company is getting more focussed. Also it has to be noted that there has not been amajor pick-upin steel demand in Europe yet. Moreover, the group has a huge debt pile on account of its acquisition of Corus in 2007.
But is the situation still that bad, even after seven years of the buyout? Not exactly. In fact,in July Moody’s had put Tata Steel and Tata Steel UK on review for an upgrade thanks to improving performance. The European operations of Tata Steel contribute 56.8 percent of the company’s production.
“On the back of improving sentiment in Europe and India, Tata Steel has been able to make swift progress on the refinancing of its European assets and opportunistically tap global markets to lock in cheaper funding for the group,” Alan Greene, a Moody’s Vice President - Senior Credit Officer, was quoted as saying in a statement.
Moody’s noted that Tata Steel UK Holdings has “generated five consecutive quarters of positive EBITDA in what remains a fragile recovery in European demand”. It, however, also said it wasn’t clear how the company could clear its debt and return to positive cash flows.
A Deutsche Bank brokerage report in September noted that the group posted solid numbers in the June quarter with revenue for Q1FY15 at Rs 36,400 crore, up 11 percent from a year ago. The report notes that 57 percent of the revenue was contributed by Europe operations, 29 percent by India, 11 percent by South East Asia (excluding India) and 3 percent by other regions.
Tata Steel had acquired steelmaker Corus for $12 billion and since the acquisition has pumped in approximately $2.6 billion into the European business through a mix of shareholder loans and equity, the Deutsche Bank report.
However, since the acquisition Tata has been forced to consistently slash costs and jobs to improve performance and remain competitive.
Producing steel profitably in Britain has become increasingly difficult given the shrinking demand, plus higher energy, labour and logistics costs compared even with mainland Europe.
“Out of its consolidated debt of $14 billion, $4.5 billion is related to its European operations (excluding shareholder loans of $1.5 billion extended by Tata Steel India). We believe the Group will continue to support its European operations by funding it from its stronger businesses (mainly the Indian business), as has historically been the case,” the Deutsche Bank report had noted.
Evidently Tata Steel didn’t want to keep doing that.
The union problem
Tata employs 30,500 people in Europe, including 17,500 in Britain and employee unions have said that were not consulted on the move to sell the units.
“The fact that Tata Steel wants to abandon half of its European operations and pull out of an entire strategic market does not bode well for the future and ends Tata Steel’s vision to be a global steel player,” the National Trade Union Steel Co-ordinating Committee said in a statement.
The committee said Tata Steel chairman Cyrus Mistry had agreed to meet workers.
The unions have called on the UK government “to intervene and ensure a future for industrial assets of “strategic importance” to the UK’s construction, infrastructure and manufacturing base,” reported the Guardian.
Vince Cable, UK business secretary, was quoted as saying in the same report that he had met with the global head of Tata during his India visit who had promised the company’s commitment to the British Steel industry and also will be seeking to meet with Klesch group.
What analysts say
The views are divided. But from the debt reduction point of view, the move is positive for the group.
An analyst has told the Business Standard that the value of the assets on sale could be about $1.3 billion.
“I do not see much value left for the equity shareholders in this sell-off. The move looks positive from the debt reduction perspective,” the analyst has been quoted as saying in the report. This also explains the more than 1 percent rise in Tata Steel shares on the BSE today.
At 10:08 a.m, the stock was at Rs 457.40, up about 0.3 percent, off its earlier highs.
(with Reutersinputs)