BackTata Steel UK: going, going...still going
Tata Steel's planned exit from the UK has moved from clarity to confusion
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Tata Steel Ltd’s planned exit from the UK has moved from clarity to confusion. In end-March, it said it wanted to exit the UK steel business, due to a weakened long-term competitive position. A proposed restructuring would need sizeable capital, involve large risks and may still not deliver. Tata Steel investors were no doubt happy at the decision to axe the UK operations. Also, the urgency on display made it seem like a decision was possible in weeks and not months.
Instead of announcing a buyer, last weekend, Tata Steel put the sale on the back burner. It now intends to bundle the entire European business, including UK, into a joint venture (JV), perhaps with someone like ThyssenKrupp AG. It cited Brexit and discussions with the UK government on pension liabilities as reasons for the review.
ThyssenKrupp’s interest in a European JV with Tata Steel was known, although it did not include the UK. On the brighter side, steel prices too have recovered since end-March, and the UK business may even be profitable now.
Tata Steel’s Indian investors are sure to fret at this development. Already, its share closed last week lower by about 4% over Monday’s close, as rumours of a deferral spread. The actual announcement came post-market hours on Friday. Why the disappointment? Firstly, there’s no firm alternative. A revised deal would have closed the chapter.
Secondly, Brexit is unfortunate for British businesses. But rising steel prices were beneficial for Tata Steel, as was the government’s willingness to give concessions to a new owner. Negotiations could have still progressed.
In fact, Liberty House Group, a bidder, was disappointed at Tata Steel’s decision, according to a Mint report.
This decision can be risky too. Steel prices could fall or the UK government may get cold feet or the pound could recover. Brexit’s contours may take a long time to show up and a deal held hostage to it can face a long delay. Also, Tata Steel’s belief about the UK operations’ structural weakness could not have changed so soon.
In the near term, this development will disappoint investors. The June quarter results may offer some solace, as higher prices could see profitability improve, especially in Europe. Steel prices and China’s stance on steel production will be key global factors to watch out for. An early closure to the European saga would definitely help. While a clean separation of its UK business would have been preferred, there will also be a faint hope that Plan B is somehow better.
The writer does not own shares in the above-mentioned companies.
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