Tata Steel may lose a high margin business with sale of speciality business

Speciality business offers tailored products for the aerospace, automotive and oil & gas sectors

Tata Steel's potential sale of UK speciality steels business may translate into paring losses but it would also mean divesting a high-value business.

On Monday, Tata Steel announced that it had signed a letter of intent with Liberty House Group to enter into exclusive negotiations for the potential sale of its speciality steels business for an enterprise value of 100 million pounds subject to due diligence and corporate approvals.

Though the exact size of the speciality steels business is not known, officials close to the development said, its value lay in its know-how. Among other industries, the business offers tailored products for the aerospace, automotive and oil & gas sectors. It's long list of customer approvals include Airbus, Bombardier, GE, Ford, Renault, Rolls-Royce, Lockheed Martin and Boeing Commercial Airplane.

"Each of these approvals take 4-5 years. If the deal is fetching just 100 million pounds, it's because of the timing," the official said.

Tata Steel's letter of intent covers several South Yorkshire-based assets including Rotherham electric arc steelworks, the steel purifying facilities in Stocksbridge and a mill in Brinsworth as well as service centres in Bolton and Wednesbury, UK, and in Suzhou and Xi'an, China.

"The products have high margins but the problem is with the fixed cost. But fixed cost can be worked on internally and also with some support from the UK government," another official explained. Speciality Steels employs about 1,700 people making steels for aerospace, automotive and the oil and gas industries.

Analysts tracking the company, however, said that the speciality steel business did not fit in Tata Steel UK's overall plan. "The company wants to focus on the Strip Products business whether it's in the UK or Netherlands," they said.

Tata Steel clarified in its statement on Monday that the speciality steels business was independent of the pan-European strip products supply chain and was in line with the overall restructuring strategy of the UK portfolio.

The LoI with Liberty for the speciality steels business comes close on the heels of Scunthorpe Steelworks sale. In May, Tata Steel sold the business for one pound. But in 100 days, the new management of Scunthorpe claimed to be in profit at an underlying level before financing costs.

"Overall, the UK market was looking up, especially with a 25 per cent depreciation in currency. Steel prices in China too have moved up," analysts said.

A better market probably, has, prompted Tata Steel to pursue 85 million pounds of capital investments covering a range of schemes. Tata Steel said, it had recently approved schemes focused on improving manufacturing capability to enable the production of premium steels in Shotton, Llanwern, Trostre, Orb in Newport and other downstream operations as well as environmental schemes for Port Talbot's power plant.

In March, when Tata Steel announced review of its European portfolio that included the option of divesting Tata Steel UK, in whole or parts, it had also said that the board had approved a restructuring and transformation plan for Strip Products UK, but it was found to be unaffordable. Whether the capital investments being pursued now is part of the bigger transformation plan is not known.

In the last nine years, Tata Steel UK has invested 1.5 billion pounds of capital and in the last five years, suffered asset impairment of 2 billion pounds

Speciality Steel Business

Assets include: Rotherham electric arc furnace, steel purifying facility in Stocksbridge, service centre

Caters to: aerospace, motorsports and oil and gas

Customer approvals: Airbus, Bombardier, GE, Ford, Renault, Rolls-Royce, Lockheed Martin and Boeing Commercial Airplane