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 last 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 $14.2 billion, at the close of Corus acquisition process on April 2, 2007, financing included about $10.5 billion as bridge funding, the balance being applied out of Tata Steel’s own cash and borrowings.
The firm raised about $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 $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 Rs322.20 apiece in the afternoon trade. Roy Rickhuss, the General Secretary of UK’s largest trade union of steelworkers, Community, called for an urgent meeting with the Prime Minister saying:
“Today, I am calling on David Cameron to meet with me urgently to discuss how his Government and my union can work together to safeguard the future of our steel industry.”
In its statement, Tata Steel said, “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.”
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.
The board 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.
It said: “Based on review conducted, the Board came to a 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.”
Following the announcement, Tata Steel shares on Wednesday jumped by 6.75 per cent to close at Rs324.40 apiece on BSE, while the rating agencies including Standard and Poor’s said the decision to sell the UK business could be credit positive.
In 2014-15 annual report, Tata Steel had 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 $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.
Of the total enterprise value of $14.2 billion, at the close of Corus acquisition process on April 2, 2007, financing included about $10.5 billion as bridge funding, the balance being applied out of Tata Steel’s own cash and borrowings.
The company raised about $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 was to 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.