Tata Steel puts UK business on the block

By PTI

  • 30 Mar 2016
Other | Credit: Reuters

Nine years after acquiring Corus to become Europe's second largest steel maker, Tata Steel has finally announced plans to sell its UK business as the company battles to control its "deteriorating financial performance".

The Board of one of the world's largest steelmakers met on Tuesday to decide on the future course of action in a bid to steer its embattled operations in Europe out of the rut, which face supply glut, increase in cheap imports amidst a continued weakness in demand in the European markets.

"Following the strategic view taken by Tata Steel Board regarding the UK business, it has advised the Board of its European holding company, Tata Steel Europe, to explore all options for portfolio restructuring including the potential divestment of Tata Steel UK, in whole or in parts," Tata Steel said in a statement late last night.

In view of the severity of the funding requirement in the foreseeable future, Tata Steel Europe Board will be advised to evaluate and implement the most feasible option in a time bound manner, it added.

Analysts attributed the development to the loan that Tata Steel took to acquire Corus as well as the "tough" environment being faced by steel firms in Europe, particularly in the UK.

Tata acquired Corus, now Tata Steel Europe, in April 2007.

The European behemoth was formed by a merger of British Steel and Dutch firm Koninklijke Hoogovens in 1999.

In its 2007-08 annual report, Tata Steel said it has completed the long-term financing programme for Corus acquisition.

Of the total enterprise value of USD 14.2 billion, at the close of Corus acquisition process on April 2, 2007, financing included about USD 10.5 billion as bridge funding, the balance being applied out of Tata Steel's own cash and borrowings.

The firm raised about USD 6.2 billion of term debt with an average life of around 5 years at competitive terms. This debt being non-recourse in nature was determined based on the cash flow servicing capability of its European operations and will be serviced by Tata Steel UK (Corus) cash flows.

The syndication of the debt was completed during the year (2007-08) with over 25 banks and institutions.

However, shortly after the deal an economic slowdown and continued weakness in European markets hit the company's sales from which the steel maker is still trying to recover.

In 2014-15 annual report, Tata Steel said its indirect subsidiary Tata Steel UK Holdings executed agreements for refinancing of debt through term loans and revolving credit facilities of 3.05 billion euro. The debt was originally incurred in relation to acquisition of Corus.

Besides, another subsidiary Tata Steel Global Holdings Pte executed agreements for loan facilities of USD 1.5 billion that will be used to repay term debt, term out working capital and fund investment needs of Tata Steel Group outside India.

Following the announcement, shares of Tata Steel rose by over 6 per cent at the BSE and were trading at Rs 322.20 apiece in the afternoon trade.

Reviewing the performance of its European operations, particularly those in the UK, Tata Steel Board on Tuesday noted with "deep concern the deteriorating financial performance of the UK subsidiary in the last 12 months".

It also reviewed the proposed restructuring and the transformation plan for Strip Products UK, prepared by the European subsidiary in consultation with an independent and internationally reputed consultancy firm.

"Based on the review conducted, the Board came to an unanimous conclusion that the plan is unaffordable, requires material funding support in the next two years in addition to significant capital commitments over the long term, the assumptions behind it are inherently very risky, and its likelihood of delivery is highly uncertain," Tata Steel said.

Therefore, the Board concluded that it would "not be able to support" the investment necessary to proceed with the proposed Strip Products UK Transformation plan, the firm said.

While the global steel demand, especially in developed markets like Europe, remained muted following the financial crisis of 2008, trading conditions in the UK and Europe have rapidly deteriorated more recently.

It is due to the structural factors which includes global oversupply of steel, increase in third country exports into Europe, high manufacturing cost, continued weakness in domestic market steel demand and volatile currency, it said.

"These factors are likely to continue into the future and have significantly impacted the long-term competitive position of the UK operations in spite of several initiatives undertaken by the management and workers in recent years," Tata Steel said.

Even under such market conditions, the Group has extended substantial financial support to the UK business and suffered asset impairment of over 2 billion pounds in the last 5 years.

The firm has also been engaging with the UK government in recent months seeking its support to achieve the best possible outcome for the UK business, within the restrictions of State Aid Rules and other statutory limits, Tata Steel said.

These discussions are ongoing and will continue.

Discussions will also continue with Greybull in relation to a sale of the UK Long Products business. The UK government is also involved in the latter discussions, it added.

Since last year, Tata Steel - one of the top ten steel manufacturers globally - has been battling one adverse situation after the other.

Last year in June, the company escaped by a whisker the ignominy of an industrial action by its employees and supported by the trade unions in the UK, which could have been the first such action in the country in over three decades.

Then in November 2015, Tata Steel said it is forced to go for more restructuring of its UK business due to a challenging marketplace and will sell Long Products Europe business by the end of 2015-16 fiscal.

Also, last month in an unexpected turn of events, it said Karl Koehler, the CEO of Tata Steel Europe, resigned and the firm has appointed Chief Technical Officer Hans Fischer as its new chief.