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Tata Steel Europe, despite prestigious contracts including that from London Crossrail, one of Europe’s biggest rail and infrastructure projects, looks unattractive as the prices for those contracts are more likely not fixed, analysts say. Photo: Bloomberg
Tata Steel Europe, despite prestigious contracts including that from London Crossrail, one of Europe’s biggest rail and infrastructure projects, looks unattractive as the prices for those contracts are more likely not fixed, analysts say. Photo: Bloomberg

Why PEs may make reluctant buyers for Tata Steel’s Europe plant

PE funds look for quick returns, typically aiming for 25% returns and are known to exit from investments in about 5-7 years

Mumbai: Could alternative investors such as private equity funds be the saviour of Tata Steel Europe’s long products plant in Scunthrope, England, which the company has been trying to sell?

Some parties are said to be interested in buying the UK plant that makes mainly long products for construction, rails, etc., as the company seeks to cut losses, and talk is that actual steel producers may be missing from the prospective buyers list.

Commodity firm Klesch group exited sale talks a few months ago, so logically the next rung of buyers could be pure investors.

If PE investors are indeed a part of that list, they could be contending with two main dissuaders.

Firstly, PE funds look for quick returns, typically aiming for 25% returns and are known to exit from investments in about 5-7 years. At present retail, telecommunications, e-commerce, pharma, healthcare and financial services are the flavours of the season and long-gestation commodity producers are the other end of the pole.

Tata Steel Europe, despite prestigious contracts including that from London Crossrail, one of Europe’s biggest rail and infrastructure projects, looks unattractive as the prices for those contracts are more likely not fixed, analysts say. The current trough after the commodity supercycle is seeing heavy sale of steel from glut-ridden China that has depressed prices.

The “last commodity bull market was there for 10 years and the bear market before that was there almost for 20 years…these are very long cycles and difficult to play for investors," says Amit Rathi, managing director of Anand Rathi Financial Services, a brokaerage. “I would be very surprised if a PE investor would take a bet on such an asset. It would be too much of a macro call which is not what typically PE funds do."

Secondly, PEs look for good quality management and even a cultural fit in companies they want to buy stakes in so that they can have some say in the operations. In Tata Steel Europe’s case, there is political interference as the state of the steel manufacturers is a subject of debate in the British Parliament.

“We all remember what happened when ArcelorMittal tried to close plants in France," says Ritesh Shah, research analyst at Investec Capital Services (India) Pvt Ltd, a subsidiary of Investec Bank Plc, a specialist bank and asset manager. “We can’t rule out similar political pressure in UK against closing of plants and job losses."

Tata Steel Europe’s statement, in response to a questionnaire, says it is looking at all strategic options for the long products business. “We are doing all we can to give the business the best chance of survival in this fiercely-competitive global marketplace," it says.

One likely strategic option could be to continue producing with some sops from the UK government in the form of national orders. But while the debt clock ticks (consolidated debt stands at 71,798.36 crore as on 30 September compared with 56,891.16 crore a year ago), could that mean more cash burn?

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