Tata Steel UK's new rescue hope

Sale of long product division to Greybull Capital can plug annual bleeding of estimated $160 million

Greybull Capital, the Britain-based investment company which plans to buy Tata Steel UK’s long product business in Europe, is known for ‘rescue deals’. Which is what Tata Steel needs for this segment, which now has zero book value and an estimated loss of $160 million (Rs 1,050 crore) a year.

In August, billionaire Gary Klesch’s company, Klesch & Co, pulled out from negotiations to buy these assets. Klesch is known as a ‘vulture capitalist’, who buys companies at scrap value. In 2012, for instance, his company bought the vinyl business division of Arkema for a symbolic €1.

Klesch & Co pulled out despite Tata Group chairman Cyrus Mistry approving a Rs 5,000-crore write-down of goodwill and assets in May that ended the book value of the UK long products division. This was to facilitate the division’s sale to Klesch & Co, with which discussion had been on for months.  

The division includes a 4.5-million tonne (mt) a year capacity unit at Scunthorpe, a fourth of the 17.9 mt capacity the company has in Europe. The division also has mills in Teesside and northern France, an engineering workshop in Workington, a design consultancy in York and associated distribution facilities. Plus Scottish mills at Dalzell and Clydebridge, currently being ‘mothballed’.

Tata’s UK operations, including long product assets, largely contributed to the operating earnings loss of $21 million for Tata Steel Europe (TSE) in the previous quarter. The company does not disclose asset-wise profitability but global brokerage Jefferies estimates a $160 mn annualised loss at Scunthorpe.

It is this asset, with zero book value and $160-mn annualised loss, that Greybull Capital might buy, at a time when Europe is going through tough economic conditions. Gross domestic product in Britain is growing at less than one per cent a year and Europe does not have an advantage in cheap iron ore, either. Also, TSE's UK operations face margin headwinds, as a stronger pound versus the euro has affected the competitiveness of its UK operations versus European Union peers. “While there is uncertainty around whether the deal goes through and at what valuation, sale of the loss-making assets should help reduce cash burn at TSE,” says Bhaskar Basu, analyst at global brokerage Jefferies. “We believe the deal would not help in deleveraging (cutting debt significantlyt), as we expect the potential deal size to be small,” says Basu.  The company had consolidated debt of Rs 71,798 crore at the end of the previous quarter and this more than double its net worth.

In October, Greybull Capital bought Monarch, a British holidays and airline company. It is investing $201 million to turn it into a budget airline.

In 2007, when Tata Steel acquired Corus for $12.1 billion (Rs 60,333 crore), India’s first Fortune 500 multinational company was born. The deal made Tata the world’s fifth largest steel producer, with annual capacity of 25 mt. The deal promised access to high-end European markets, supported with low-cost Indian manufacturing. The company had been on an acquisition spree for the earlier two years — it had acquired NatSteel in Singapore and a 67 per cent stake in Thailand’s Millennium Steel, applying the same logic of shipping low-cost steel slabs to  finishing plants abroad.

Corus was, however, also bought at a 34 per cent premium to Tata’s original bid, as Brazil’s CSN got into the race. It was a boom time for the steel industry, due to rising demand from China before the 2008 Olympic Games.

“Steel is a cyclical business and in a bad cycle, only the best assets survive,” says an investment banker, who had worked on Tata’s acquisition of Corus. He did not wish to be identified. “The acquisition was in sync with the reality of that time and the selloffs are a bitter reality of today. That is business.” He adds that judging a business decision with the benefit of hindsight is of limited value.

“While a potential deal could help curtail losses at TSE partly, it would not fully alleviate TSE’s woes. Headwinds at TSE's other UK unit (Port Talbot) would continue to weigh on Ebitda (operating earnings),” says Basu at Jefferies.

TATA STEEL EUROPE

THE UK — 10.2 million tonne (mt)

• Port Talbot steelworks, West Glamorgan, Wales: 4.9 mt
• Scunthorpe steelworks, South Humberside: 4.5 mt
• Rotherham steelworks, South Yorkshire: 0.8 mt

THE NETHERLANDS — 7.2 mt

• Ijmuiden steelworks: 7.2 mt

Capacity figures are annual
Source: Company website