Tata Steel to sell part of UK business to Greybull Capital

Mumbai: The Tata group has started disentangling itself from Corus Group Plc., agreeing on Monday to sell one of its main steelworks to investment firm Greybull Capital Llp.

Under the agreement, which will save about 4,800 jobs, Greybull Capital will pay a nominal £1 for the entire long-products business and take over its assets and liabilities.

The deal includes a £400 million investment and financing package for the business, as well as agreements with suppliers and unions on cutting costs.

The transaction came at the start of the formal sale process of Tata Steel Ltd’s UK assets, which it acquired in 2007 through the $12.9 billion (around £9.2 billion today) purchase of Corus Group.

Tata Steel signalled its intention to divest the business at the end of March, saying it couldn’t sustain the losses it was taking any longer. 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.

The deal with Greybull will save about a third of those jobs—4,400 in the UK in addition to 400 in France.

“This sale is the best possible outcome for employees who have worked relentlessly to ensure the business’s survival, and helped to make it attractive to a potential buyer,” said Bimlendra Jha, executive chairman of the stand-alone long products business.

The sale covers several UK-based assets including Scunthorpe steelworks, two mills in Teeside, an engineering workshop in Workington and a design consultancy in York along with a mill in Hayange, France.

“The agreement is an important milestone on the road towards continuing steelmaking in Scunthorpe and steel processing in other locations in the UK and France,” the company said.

In a separate statement, Greybull added that it would take over the associated sales and distribution network as well. Products from this division would now sell under the brand British Steel, Greybull said.

The deal is subject to the resolution of conditions including transfer of contracts, government approvals and the completion of financing arrangements, Tata Steel Europe said in a statement. Deal closure may take eight weeks.

Greybull is arranging the £400 million investment and financing package for the business from a combination of banks and shareholders to fund working capital and future investments, it said.

“An agreement to reset the cost base of the business has been reached with key suppliers and, importantly, trade unions. Greybull believes these vital changes will make British Steel competitive. The trade union agreement is subject to a ballot of union members which will take place over the next few weeks,” it said.

The existing management team will stay and run the business, implementing the plan that they have drawn up to return the company to profitability. The search for a permanent chief executive officer (CEO) has started and an appointment will be made in due course, Greybull said.

Hans Fischer, CEO of Tata Steel’s European operations, said the company was pleased with the deal.

“Under these current challenging market conditions in Europe with the soaring levels of imports from China, we are happy that Tata Steel UK and Greybull Capital have entered the final stage of completion of the sale of shareholding in Longs Steel UK. This transaction will offer a future for the Long Products Europe business and its 4,400 employees in the UK,” said Fischer.

Tata Steel Europe has appointed KPMG Llp as advisers for the sale of its UK assets.

“Following the recent advice from the Tata Steel Board to evaluate all options for the portfolio review of Tata Steel UK, the board of Tata Steel Europe at its meeting held on 31 March 2016 reviewed several options and, keeping in view the interest of all stakeholders, has decided to commence the process of divestment of its entire shareholding in its subsidiary Tata Steel UK,” Tata Steel Europe said in a separate statement.

Slaughter and May will be the legal advisers to the proposed transaction.

“It is the intention of Tata Steel Europe to run a thorough, but expedited sale process by reaching out to a wide universe of potential investors globally. The formal process has commenced today with the despatch of the Summary Information Memorandum to potential investors,” the statement said.

KPMG and Slaughter and May also advised Tata Steel UK on the successful divestment of the long products division.

Greybull is not taking on pension liabilities under the deal with Tata Steel.

“The British Steel Pension Scheme become deferred pension scheme on completion of this deal. Greybull would put in a defined contribution scheme in place. In addition, there are pension schemes such as Rail Pension scheme for Rail Consultancy business, a pension scheme in Ireland and Hayange (France) would transfer to the new owners. The business is being transferred on a debt-free basis,” Tata Steel said in an e-mailed response to a query from Mint.

Tata Steel has been struggling with its European business since the 2007 acquisition, the biggest by an Indian company, amid declining demand for steel and a sharp drop in the price of the alloy as well as competition from cheap Chinese imports.

“Any deal for Tata Steel is a good deal even if it does not include transfer of the debt and pension liabilities,” said Rakesh Arora, managing director at Macquarie Capital Securities India Pvt. Ltd.

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.

The debt related to the long products division of Tata Steel Europe may be between Rs.12,000 crore and Rs.15,000 crore, said Rahul Dholam, an analyst at Angel Broking Pvt. Ltd.

“Whether it is a good deal or not depends at what nominal consideration has the deal been struck and how much debt can be reduced. However, the deal allows Tata Steel to get rid of the assets,” he said.

Tata Steel shares rose 2.76% to Rs.331.15 at the close of trading on the BSE on Monday as the benchmark Sensex gained 1.41% to 25,022.16 points.