Due diligence for Tata Steel Netherlands biz to complete by December end

The country's oldest steel producer is currently in talks with SSAB Sweden for the sale of its Dutch operations, as it seeks to make a full exit

Tata Steel, the country’s oldest steel producer, in talks with SSAB Sweden for selling its Netherlands business, expects due diligence to complete by the end of December, paving the way for a sizeable reduction in its debt.

“Our current proposal is to fully exit the business and we plan to use the proceeds for deleveraging the balance sheet. There is no plan to keep stake in the business as of now, but such things usually get finalised during negotiations and binding agreements, which come after due diligence,” Koushik Chatterjee, executive director and chief financial officer at Tata Steel, told reporters on Tuesday in a post-earnings conference call.

Shares of Tata Steel on the BSE touched Rs 530.80 on Tuesday in intra-day trades before ending at an 18-month high of Rs 522.80, up 6.24 per cent from the previous close.

Tuesday’s gains were led by a strong set of September-quarter (Q2) results, posted last Friday, as well as optimism on debt reduction.

The company reported consolidated earnings before interest, taxes, depreciation, and amortisation (EBITDA) of Rs 6,217 crore for Q2, up 60 per cent year-on-year, beating expectations.

“Ijmuiden (the Netherlands) is one of the best-managed plants in Europe ... We expect the plant to fetch an EV (enterprise value) of $2-2.5 billion, given the current steel cycle,” said analysts of Emkay Global said in Tuesday’s report.

On valuations, while an analyst estimated it at $1.6 billion, another said it was closer to $2.5 billion.

Of the capacity of 33 million tonnes at Tata Steel, that of European operations stands at 12.3 million tonnes.

Meanwhile, the company is pursuing separate strategic road maps for the Netherlands and UK businesses.

“The Netherlands has no material debt, but European operations overall carry a debt of 1.75 billion euros. Depending on how the deal gets stitched up, we will look to lower debt from the proceeds but cannot estimate how much debt reduction will happen at this juncture,” said T V Narendran, managing director and chief executive officer, Tata Steel.

The company has a target to lower its debt by $1 billion annually. The proceeds from selling the Netherlands business, to be used to lower debt, will be over and above the annual target.

As of September 30, 2020, Tata Steel’s consolidated net debt stands at Rs 96,495 crore.

“The deal (with SSAB) will differ from that of Thyssenkrupp in the absence of overlap in product portfolio, and this can help get EU ATS approval,” ICICI Securities said in its report.

For the past six months, the company’s Europe business has been cash-neutral and the mandate is to carry on operations without India support, said the management.

Tata Steel Europe deliveries in the September quarter improved 15 per cent sequentially, with recovery in steel demand and stable steel production.

Tata Steel is in dialogue with the British government for a long-term sustainable business solution for its loss-making Port Talbot.

“We do not rule out Tata Steel’s exit from Port Talbot similar to Scunthorpe in a worst-case scenario,” said Emkay Global.

In 2016, Tata Steel sold its Scunthrope steel plant in the UK to London-based Greybull Capital for just £1.

Meanwhile, 79.3 per cent of brokerages have a “buy” rating on Tata Steel, while 13.8 per cent have placed a “hold/neutral” call. The consensus 12-month target price is Rs 573.33 per share.