Dumping Chinese steel mills could acquire Tata Steel UK

Cornered by the dumping of cheap steel produced at Chinese steel mills, Tata Steel UK could finally be selling its UK assets to industry groups from China or Japan as the Indian conglomerate looks to offset swelling losses at its British operations.

Tata Steel on Monday announced the appointment of StanChart as additional advisors for the sale of its UK assets. The bank will work alongside KPMG LLP, whose appointment was announced on 11 April, the company said in a release.

In a statement to the stock exchanges, the Tata Group said the process for the sale of the UK plants has entered a definitive stage with the appointment of Bimlendra Jha, executive committee member of Tata Steel Europe as the chief executive officer of Tata Steel UK.

Jha is currently executive chairman of Tata Steel Europe's Long Products Europe business and has successfully led the divestment process that resulted in the signing of a sale and purchase agreement with Greybull Capital on 11 April.

Jha, in this new position, will report to Hans Fischer, chief executive officer of Tata Steel Europe. He will be supported by a team of executives drawn across functions, including operations, procurement, finance, human resources and commercial, the release said.

''Today's announcement by Tata Steel Europe will ensure the full focus on the vital tasks that lie ahead of Tata Steel UK. Bimlendra's successful experience of the process of divestment of Long Products Europe will be invaluable as Tata Steel Europe explores strategic alternatives for its operations in the UK. He will be supported by a team with immense operating experience of the UK business. To deliver greater clarity for all key stakeholders such as employees, customers and suppliers, it is important for the new team to seek all credible options in a time bound manner,'' Koushik Chatterjee, group executive director of Tata Steel Limited, said.

''Over the last seven days, the advisers to Tata Steel Europe have begun initial exploration of interest in Tata Steel's UK operations reaching out to 190 potential financial and industrial investors worldwide,'' the releases said, adding that the company will share detailed information after the confidential phase of negotiations.

Tata Steel is Europe's second largest steel producer. With steelmaking in the UK and Netherlands, and manufacturing plants across Europe, the company supplies products to industries in the construction, automotive, packaging, rail, lifting and excavating, energy and aerospace sectors across the globe.

Tata Steel has set an internal deadline of 8 weeks to identify interested buyers for the entire asset, failing which it will look to sell individual assets in separate deals.

Earlier this month, Tata Steel sold its long product division in UK to Greybull Capital, for a token sum of 1 pound (See: Greybull to buy Tata's UK long steel arm for £1 ).

Tata Steel acquired struggling European steelmaker Corus for $12 billion In August 2007, in what was India's biggest cross-border acquisition. That the acquisition coincided with Tata Steel's centenary year made the deal extra special.

But that did not last and the company's woes continued even under Tatas and its debt ballooned making it unsustainable.
 
For one thing, Tata Steel acquired Corus after paying a 34 per cent premium at 608 pence a share to its original offer, in a bid war with another suitor, Brazilian steelmaker CSN.

Tata Steel was then desperately looking for a global acquisition and demand for steel was also booming then. According to Tata Steel's presentation to analysts after the acquisition, global steel demand was expected to grow 5.9 per cent to 1,179 million tonnes in 2007; China's steel demand was set to grow 13 per cent and the demand in India was expected to grow 10.2 per cent in the same year.

The next seven years, however, saw steel prices crash from $600 a tonne to $400 and lower. China's supply far outstripped demand and the developed world's demand growth turned negative. Emerging markets, including India, were relatively better off but were affected by cheap imports.

Tata Steel tried to save Corus. A number of restructuring initiatives like 'Weathering the Storm' and 'Fit for the Future' followed.

In March 2011, Tata Steel sold Teeside Cast Products to Sahaviriya Steel of Thailand for $467 million tonne. Last week, Scunthorpe was sold to Greybull Capital for a token £1, according to reports in the British media. Port Talbot too is on the block. In short, Tata Steel is giving up on the UK units after a nine-year struggle.

Over the past seven days, the advisors to Tata Steel Europe have begun initial exploration of interest in Tata Steel UK's remaining operations, reaching out to 190 potential financial and industrial investors worldwide, Tata Steel said on Monday.

To focus on the "vital" tasks that lie ahead, Bimlendra Jha, executive committee member of Tata Steel Europe, has been appointed as the chief executive officer of Tata Steel UK.

The asset sale might do the company some good. Tata Steel has invested £1.5 billion since the acquisition in modernising the outdated plants. It has, as a result, suffered asset impairment of more than £2 billion over the past five years. The company's loss per day is estimated to be to the tune of £1 million. Clearly, it is a losing proposition.

After the sale of assets in the UK, Tata Steel Europe would own only the highly efficient and profitable Ijmuiden facility in the Netherlands, which could lead to a sharp improvement in Tata Steel Europe's margin and profitability.

For the year ending March 2015, Tata Steel UK operations reported an EBIDTA (earnings before income, depreciation, taxes and amortisation) loss of £170 million compared to Ijmuiden's positive EBIDTA of ¤499, says the Deutsche Bank report.

Essentially, it's the non-performing assets that Tata Steel is getting rid of. "The potential sale of assets in the UK is likely to lead to a significant improvement in Tata Steel Europe's margin and profitability profile and decline in cash flow drag (estimated at $500 million per annum) for the free cash-generating Indian entity, providing a strong case for re-rating," the report further adds.

Media reports said, Tata Steel is exploring the option of forming a joint venture between its Dutch operations and Germany's diversified industrial conglomerate Thyssenkrupp (Tata Steel in talks for stake in Germany's ThyssenKrupp).