BackTata Steel’s plan to sell UK assets won’t pare its debt
Greybull Capital deal doesn't include transfer of debt; other potential buyers also say theywon't take onliabilitieson the units
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Mumbai: Tata Steel Ltd’s plan to sell its loss-making UK assets will do little to reduce the company’s substantial debt.
On Monday, Tata Steel announced the sale of its Long Products Europe (LPE) business to Greybull Capital LP for a nominal consideration. The deal did not include a transfer of the debt associated with the division. While Tata Steel does not disclose the debt associated with each individual asset, the debt attached to the LPE division is estimated by analysts to be in the range of ₹ 12,000 crore to ₹ 15,000 crore.
The Greybull deal is an indicator of the kind of valuations expected from the divestment of other units of Tata Steel UK. It also shows that the asset sales may not help in bringing down the company’s debt.
“We believe that sale to Greybull Capital is a precursor for valuation of other assets," Amit Dixit, an analyst with Edelweiss Securities Ltd, wrote in a 11 April note to clients. He added the sale to Greybull is unlikely to yield any benefit by way of reduction of debt.
On 30 March, Tata Steel announced it will consider various restructuring options for its steel assets in UK to stem the financial drain due to these operations. These assets have been losing money because of a combination of factors like cheaper imports and weak steel demand coupled with high manpower and energy costs. Tata Steel’s UK assets comprises its old Port Talbot steel making plant and related facilities. On Monday, the company started the process to sell Tata Steel UK and hired KPMG Llp and law firm Slaughter & May as advisers for the proposed transaction.
According to Tata Steel’s 2014-2015 annual report, the company’s European operations reported Ebitda (earnings before interest, tax, depreciation and amortization) of £290 million, including profit of £460 million in the Netherlands and loss of £170 million in the UK (including Scunthorpe and Port Talbot).
Tata Steel has three integrated (blast furnace-based) steelmaking sites in Europe—IJmuiden plant in the Netherlands, Port Talbot in south Wales and Scunthorpe in north-east England.
Parita Ashar, an analyst with Ambit Capital, in a report on Tuesday, said that the UK asset sale is unlikely to move the needle for Tata Steel’s valuation as debt concerns remain. “Majority of Tata Steel’s consolidated debt relates to the original Corus acquisition that is unlikely to be taken over by the new buyers/deleverage Tata Steel’s balance materially," she wrote.
Potential buyers for the remaining UK assets like commodities tycoon Sanjeev Gupta-led Liberty House have also indicated that they will not take on the liabilities and the debt associated with these plants. This means that Tata Steel will still need to look for ways to bring down debt on its books.
“The debt burden will continue to be an overhang. It is clear that this deal will not help them repay it. The deal with Greybull in fact indicates that in case of Port Talbot too, there may not be any relief on the debt part." said Goutam Chakraborty, an analyst with brokerage Emkay Global Financial Services.
As of September 2015, Tata Steel had a consolidated debt of ₹ 71,798 crore—most of it associated with the global operations. The standalone debt of Tata Steel India was at ₹ 25,332 crore.
To be sure, Tata Steel is not under immediate repayment pressure.
Through multiple refinancing deals struck in the last two years, Tata Steel has ensured that the repayment schedule has been stretched.
Since July 2014, Tata Steel has refinanced debt worth $8.5 billion, of which $1.5 billion was refinanced in December 2015. This included debt originally incurred in relation with the $12.9 billion acquisition of Corus Group Plc in 2007. The refinancing ensures there is no repayment of principal due from Tata Steel UK Holdings Ltd until 2019, the company said in an email response on 2 December.
An email query sent to Tata Steel on Tuesday remained unanswered.
amritha.p@livemint.com
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