 "Tata Steel may sell UK long product plant for a token amount")
So, it did not come as a surprise last week when Tata Group chairman Cyrus Mistry took the step to recognise Rs 5,000 crore write-down to goodwill and assets that impaired the long products division of the UK business. The step was to facilitate the sale of the division to Klesch & Co with whom discussions had been going on since October. The division includes a 4.5 million tonne (mt) steel production capacity at Scunthorpe, which is a fourth of the 17.9 mt capacity the company has in Europe. The division includes mills and workshops in other parts of the UK.
All this now carries zero value on Tata Steel’s books, merely eight years after the company bought Anglo Dutch company Corus in 2007 for $12.1 billion (Rs 60,333 crore) and later named it Tata Steel Europe. Now, if the deal with Klesch & Co culminates with Tata Steel accepting a token amount for its long products unit, it will not be surprising.
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“Doing full impairment clearly signifies that the company sees no hope for its turnaround in foreseeable future and it can be sold at a token price to stop bleeding,” G Chokkalingam, founder and managing director, Equinomics Research and Advisory, says while pointing out that the Europe is going through tough economic condition. The GDP in the UK is growing at less than one per cent; besides Europe does not have advantage of cheap iron ore. “It is a bold decision, which also signifies that the other loss making units of Tata Steel Europe can come on the block if they continue to bleed,” he adds.
The company has 4.9 mt capacity at Port Talbot and 0.8 mt capacity at Rotherham in the UK. In addition to that, it has 7.2 mt capacity at IJmuiden in Netherlands. Tata Steel does not provide operational performance data of its individual plants but the UK units of the company are under great stress. In the quarter ended December, Tata Steel Europe reported Ebitda (earnings before interest, tax, depreciation and ammortisation) of Rs 1,308 crore. The interest outgo for the quarter is not available.
In 2007, when Tata Steel acquired Corus, India’s first Fortune 500 multi-national company was born. The deal made Tata Steel the world’s fifth-largest steel producer with an annual capacity of 25 mt. The deal promised access to high-end European markets, supported with low-cost Indian manufacturing. The company was in fact 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 as well, due to rising demand from China before the 2008 Olympics.
“Steel is a cyclical business and in a bad cycle only the best assets survive,” says an investment banker, who had worked on Tata Steel’s acquisition of Corus. He did not wish to be identified. “The acquisition was in sync with the reality of that time and the sell offs are a bitter reality of today, that is business,” he says, pointing out that it is not prudent to judge business decisions with the benefit of hindsight.
A company spokesperson declined to comment as Tata Steel is in silent period before it announces its results on Wednesday.
TATAT STEEL EUROPE
Capacity figures are annual
THE UK 10.2 mt
- Port Talbot steelworks, West Glamorgan, Wales: 4.9 mt
- Scunthorpe steelworks, South Humberside, England: 4.5 mt
- Rotherham steelworks, South Yorkshire, England: 0.8 mt
- IJmuiden steelworks, The Netherlands: 7.2 mt