Gone For One Pound! Why Tata Steel’s Scunthorpe Deal Is No Surprise

Tata Steel is selling its Scunthorpe steel plant in UK to London-based Greybull Capital for a nominal 1 pound (around Rs 95). It also agreed to retain the entire debt and pension liabilities associated with the Scunthorpe plant. The terms of the deal seem to be skewed against Tata Steel, but analysts think otherwise.

Here are the latest developments:

1) Tata Steel sold the Scunthorpe plant for a nominal value because there are no takers for loss-making steel units at a time when the global steel industry has been hit by plunging prices, analysts say. Rakesh Arora of Macquarie Capital said Tata Steel’s UK assets are loss making, so any kind of a deal is a positive.

“We never expected anything from these assets, in fact we wrote that zero is the best case outcome for these assets,” he told NDTV Profit.

2) Tata Steel’s management also seemed to have reconciled for such a deal. Koushik Chatterjee, group executive director (finance and corporate) of Tata Steel, told NDTV Profit last month that the company’s assets in UK have been impaired, so the sale of business is not about valuations, but about reducing risk and exposure.

3) Analysts say carry-over of debt and pension liabilities associated with the Scunthorpe plant are a setback, but the reduction in cash outflows at the unit, post completion of sale, is a big positive for Tata Steel. “Overall reduction in the annual cash burn far outweighs the negatives of pension liabilities,” said PhillipCapital.

4) Tata Steel’s Scunthorpe plant specialises in manufacturinglong products (steel used in construction and infrastructure projects) for which demand is weak due to subdued construction markets. Long Product business in Europe (LPE) has been the biggest drag on Tata Steel’s profitability, analysts say. According to PhillipCapital, Tata Steel’s LPE business is estimated to have incurred an operating loss of nearly 100 million pounds (based on FY15 financials).

5) Tata Steel is expected to sell its Port Talbot steel plant – Britain’s biggest – at a nominal cost as well. “We are expecting a similar kind of deal or maybe a little bit worse because steel-making in Talbot is not viable at all. There will be more cost associated with Port Talbot as compared to Scunthorpe… A zero price sale is the best case outcome,” said Mr Arora.

Brokerages on Tata Steel:

PhillipCapital revised its target price on Tata Steel from Rs 330 to Rs 385 saying the Scunthorpe deal is the starts of a new journey for the company.

The completion of sale of Tata Steel UK can lead to the avoidance of cash flow losses in the company and will provide value of Rs110 per share as per our calculation, said ICICI Securities.