Mumbai: When Ratan Tata made a £6.2-billion ($12.9 billion) winning bid for British steelmaker Corus Group Plc in 2007, the world saw it as an Indian firm acquiring a global footprint.
“Hopefully in future, people will look back and say that we did the right thing,” the then Tata Group chairman said while closing the landmark deal.
But fate proved otherwise. The deal hamstrung Tata Steel Ltd as the global steel industry buckled under low prices due to oversupply. World steel production doubled between 2000 and 2015, with China accounting for half of it. The first sign that Tata’s Corus buyout turned out to be a misstep came in 2013, six years after the deal, when Tata Steel announced a $1.6 billion impairment or goodwill write-off.
Tata Steel continued to bleed. On 29 March, it took a final call and decided to sell its UK operations, called Tata Steel Europe Ltd. The company said that it will consider various restructuring options, including a partial or full sale of its UK assets, putting in jeopardy nearly 15,000 jobs. Since the announcement to 8 April, Tata Steel stock fell 0.66%, while the benchmark Sensex fell 2.62% and BSE Metal Index dropped 1.73%.
On Monday, the $108-billion Tata Group will start on the long road of selling its loss-making UK steel business. Finding a new buyer may not be easy, say analysts, as the turnaround for the business is difficult.
The new buyer will assess not only the assets but also its legacy issues. Tata Steel’s UK assets comprise its Port Talbot steel plant along with some of its other related facilities.
“If it (turnaround) was that easy Tata Steel would have done it,” said Rakesh Arora, managing director of brokerage Macquarie Capital Securities India Pvt. Ltd. (Visit www.macquarie.com/disclosures for disclosures.)
In his 6 April report on Tata Steel, Arora said the company’s UK assets have structural issues, such as high labour, energy and regulatory costs, that make them unviable over the long term.
There are legacy issues too. Four years before its sale to Tata Steel, Corus had just emerged from the verge of bankruptcy. And before that it was British Steel Corp. formed by nationalizing around 14 steel companies in July 1967.
According to Peter Brennan, editor (steel) at commodities information provider Platts, this makes for one of the primary issues with Tata’s British assets.
“Not all assets—the rolling line, finishing line, the smelter—are based in one location, which mean freight costs involved in coordinating between various facilities. This is a legacy issue from privatization and nationalization of assets,” Brennan said over a phone call on Friday.
In 1975, British Steel was making huge losses and by the end of 1980, it had seen a 13-week-long national steel strike, shut various facilities and cut up to 268,500 jobs, according to information available on Corus on the Tata Steel Europe website.
In 1987, British Steel was privatized and later merged with Dutch steel firm Koninklijke Hoogovens to form Corus in 1999. It was a profitable venture by then.
In its 30 March statement, Tata Steel said the management tried many ways to improve the financial performance of its UK assets but failed to see a long-term future. “…trading conditions in the UK and Europe have rapidly deteriorated more recently due to structural factors, including global oversupply of steel, significant increase in third country exports into Europe, high manufacturing costs, continued weakness in domestic market demand in steel and a volatile currency,” the statement said.
Harish H.V., partner at advisory Grant Thornton India Llp, agrees that the group tried its best to turn around its European operations. “Now it’s like better late than never. Also, the Tatas did not get support from the UK government. The decision to exit from the UK will cut the losses and debt of Tata Steel,” he said.
As of 30 September, the consolidated debt of Tata Steel wasRs.71,798.36 crore. The total long-term debt of its Europe business is about €3 billion.
So, can a new buyer turn around an asset that its previous three owners have struggled with? “Many people in the industry believe that there is no real future for blast furnaces in the UK,” said Brennan of Platts.
Port Talbot, Tata Steel’s main steel-making facility in the UK, is a blast furnace facility. Several analysts also point to the fact that the energy costs in the UK are higher compared to remaining parts of Europe.
Then, there is a higher manpower cost involved, said Arora of Macquarie Capital.
Tata Steel so far has invested about €2 billion—capital expenditure and working capital combined—in its UK assets.
Analysts do not see many potential takers who can salvage the UK steel business.
Commodities tycoon Sanjeev Gupta’s Liberty House for now has expressed interest in these assets, but he has no plans to take over the debt associated with it.“Even if someone like Liberty House takes over the assets, would it have enough to run the plant’s daily working capital needs, remains a question,” said Goutam Chakraborty, an analyst at domestic brokerage Emkay Global Financial Services Ltd.
Analysts are ruling out interest from others like the world’s largest steel producer ArcelorMittal SA and large steel firms from China, Russia and Japan, who either have the scale or financial muscle to execute a deal.
“ArcelorMittal has its own mess to deal with, there is no scope for them to come in, they are too big in Europe and may not get the permission from the competition commission. Only rolling assets can make sense to them (Russian and Japanese steel makers). Port Talbot will still have to be closed,” said Arora.
A spokesperson for ArcelorMittal in India refused to comment. ArcelorMittal reported a loss of $7.9 billion for calendar year 2015 due to the slowdown in the European steel market.
Mothballing may be the ultimate solution in case a buyer is not found, but labour laws are very stringent in the UK, and there will be high costs associated, according to the 6 April report by Macquarie Capital.
Mothballing involves preserving a production facility by not using it full-time, thus allowing it to produce goods on demand.
“The pension liability will still remain, which currently has a shortfall of £90 million and will take something more to fully exit,” the report said.
According to a 4 April report by domestic brokerage firm India Infoline Ltd, discontinuation of the UK operations in any form would be positive, but it cautioned that in case of shutdown, retrenchment compensation could be Rs.2,000 crore.
The road ahead for Tata Steel, in its lookout for a buyer or shutting down its UK assets, leads to India. “Commissioning Kalinganagar would be the next thing for Tata Steel. As it appears, the share from India operations to overall financials will increase, which is a good thing.
In addition, once the sale or shut down of UK assets is complete, India operations will not need to support the losses in UK,” said Jayanta Roy, senior vice-president at ratings agency Icra Ltd.
Tata Steel has the capacity to make 13 million tonnes of steel a year, and it includes a 3 million tonne capacity at Kalinganagar plant which is at present in the ramp-up mode.