Tata Steel's JV route for Europe positive

But, too early to feel excited, given the early stage and lack of clarity on the contours of any deal; more crucial is to get UK assets included in the deal

It’s early days for the Tata Steel-ThyssenKrupp joint venture as the German steel major is in discussion  with many companies.

“The entire steel industry in Europe is struggling to safeguard the future of its business,” ThyssenKrupp said, in response to an e-mail from Business Standard.

“Just a few steelmakers in Europe are profitable in the current environment — ours is one. We have repeatedly emphasised in this situation that we believe a consolidation of the European  industry is necessary. In this situation, everyone is talking to one another. Among others, we also are in talks with Tata Steel.”

The company further clarified: “We presently do not intend to make any further announcements in this regard, unless and to the extent there are material developments in the process which may enable a consolidation.”

Tata Steel, too, had said it had entered into discussions with strategic players in the sector, including ThyssenKrupp AG, to look at alternative and more sustainable portfolio solutions for its European businesses.

The announcement that came late Friday night from Tata Steel after a marathon board meeting hasn’t excited the Street. For one, the Street is not sure about the contours of the deal being discussed by Tata Steel and ThyssenKrupp.

“It is likely that Tata Steel is looking to consolidate its Ijumuiden plant in the Netherlands. Ijmuiden and ThyssenKrupp are competitors and a consolidation in a weak European market would make sense for both the entities," a former top official of Tata Steel said.

The main competitors of ThyssenKrupp are Tata Steel Europe and Voestalpine AG.

“Together, Tata Steel and ThyssenKrupp could be price setters,” the official explained.

Though a leader, ThyssenKrupp’s earnings before interest, taxes, depreciation, and amortisation (Ebitda) margins fell from 17.2 per cent in FY13 (financial year ending September 30) to 7.2 per cent in FY15. The company is, however, operationally profitable. For trailing 12 months ending March 2016, the company reported revenue of euro 4.1 billion, Ebitda of euro 2.8 billion and net profit of euro 646 million.

In comparison, Tata Steel Europe reported an Ebitda loss of Rs 696 crore for FY16 versus an Ebitda profit of Rs 4,285 crore in FY15. However, this includes the UK operations, reportedly the culprit for the losses.

Tata Steel has indicated that the talks with ThyssenKrupp pertain to its European operations. Going forward, it could be explored whether Tata Steel UK could be included in these discussions but that was subject to various parameters like suitable outcome for British Steel Pension Scheme, successful discussions with the UK trade unions and the delivery of policy initiatives and other support from the governments of the UK and Wales.

Ijmuiden is Tata Steel group's largest single steel plant with a crude steel production capacity of seven million tonnes. It is known for producing high quality steel.

Port Talbot, a part of Tata Steel UK and till Friday was up for sale, produces a similar set of products as Ijmuiden but the plant doesn't have all the facilities at the finishing end.

In March, Tata Steel had announced restructuring of its European portfolio that included potential divestment of Tata Steel UK, in whole or in parts, after struggling to make it work for about nine years.

The Tata Steel Group had extended substantial financial support to the UK business and suffered asset impairment of about £2 billion in the past five years.

Subsequently, seven bidders expressed interest in Port Talbot. But, the UK's decision to leave the European Union changed the complexion of the deal, as Tata Steel said the bids had been reviewed in the light of the referendum and consultations with the government on the British Steel Pension Scheme.

An advisor to one of the prospective bidders said the UK government was ready to give a soft loan of £1 billion to the buyer of Port Talbot. It had also offered 25 per cent equity.

“It is most likely that the same offer would hold for Tata Steel,” he said.

UK Business Secretary, Sajid Javid, who met the Tata Steel management in Mumbai before its board meeting tweeted after the announcement on stalling of the sale process for Port Talbot: Encouraging news for UK steel tonight. Government will continue to provide all support it can.

But, in the immediate term, the Street might not take it kindly as many of the participants had already started building in a sale of the loss-making UK assets. The Brexit event and now stalling of the sale have once again led to uncertainties.

Goutam Chakraborty at Emkay Research says one is not sure on outcome of Brexit and trade agreements that will follow and feels that sale of UK assets getting stalled is a negative development.