Tata Steel sells SE Asian operations to Chinese firm for $327 million, equity interest

  • Tata Steel has signed pact with HBIS Group to divest majority stake in SE Asia business
  • The definitive agreements were signed in Beijing on Monday and the deal is expected to close in 2-3 months

MUMBAI: Tata Steel Ltd has agreed to sell most of its steel business in South-East Asia to China’s state-owned HBIS Group as the Indian steel maker continues efforts to trim its massive debt and focus on its fast-growing home market.

Mumbai-based Tata Steel will sell a 70% stake to HBIS for $327 million in cash. It will retain a 30% stake.

Under the deal, TS Global Holdings Pte. Ltd (TSGH), an indirect wholly-owned unit of Tata Steel, signed definitive agreements with an entity controlled by HBIS to sell its entire stake in NatSteel Holdings Pte Ltd. and Tata Steel (Thailand). “As per the agreement, the divestment will be made to a company in which 70% equity shares will be held by an entity controlled by HBIS and 30% will be held by TSGH," Tata Steel said in a statement.

The pacts were signed in Beijing on Monday and the transaction is expected to close in two-three months, T.V. Narendran, managing director and chief executive of Tata Steel, said in a conference call.

“Our experience in Southeast Asia and their (HBIS’s) aspirations in this geography make this a good partnership," Narendran said. “HBIS was keen to build a partnership with Tata Steel and we believe we could optimize value by divesting and taking advantage of any upside over the next three years… We have a commercial relationship with HBIS and we want larger cooperation in many other areas. This is a good starting point."

Since taking control of Tata group, chairman N. Chandrasekaran has focused on Tata Steel regaining its premier role in the domestic steel market.

The company bid aggressively for bankrupt Bhushan Steel Ltd, boosting its capacity in the autupside over the next three years… We have a commercial relationship with HBIS and we want larger cooperation in many other areas. This is a good starting point."

Since taking control of Tata group, chairman N. Chandrasekaran has focused on Tata Steel regaining its premier role in the domestic steel market.

The company bid aggressively for bankrupt Bhushan Steel Ltd, boosting its capacity in the auto steel segment. Tata Steel also bought the steel business of Usha Martin Ltd last year. The acquisitions saw Tata Steel’s gross debt swell to 1 trillion as of the end of September.

Tata Steel also forged partnerships with Thyssenkrupp AG in Europe to rescue what it could from the acquisition of Corus, which has seen massive write-downs in value, while also looking to sell five non-core units in Europe.

“I believe that with this sale, Tata Steel would be able to reduce debt and their return on equity will improve," said Sanjiv Bhasin, executive vice-president, markets and corporate affairs, at IIFL Securities Ltd. “The big Damocles’ sword is really the European operations, and once the JV (joint venture) with Thyssenkrupp goes through, the debt overhang will ease and that Tata Steel stock will be re-rated. Tata Steel is the lowest-cost steel producer in the world—they have captive power, their own iron ore mining rights—so it makes best sense for them to focus on India."

“Steel is seeing the downside of the cycle now, but I believe that once the Chinese new year has come and gone, we will see steel prices firm up and demand pick up. So, any debt reduction for Tata Steel will directly improve their Ebitda," he said. Ebitda is earnings before interest, tax, depreciation and amortization.

Tata Steel bought NatSteel Singapore in 2004 for 1,313 crore, the first of its investments in South-east Asia, and bought into a Thai steel company, Millennium Steel, two years later. However, operations have proved lacklustre from the start, with production numbers of both low and the units struggling to consistently report profits. The two units contributed 9,542 crore, or 16%, to a total revenue of 60,519 crore in FY18, but only 437 crore, or 2%, to the total Ebitda of 22,045 crore.

“India allows us a lot of growth opportunities and we want to stay focused in India from a growth point of view," Narendran said. “In other geographies, we want to create structurally strong enterprises that can stand on their own so that the parent can focus its capital on growing the India business."

HBIS is among the largest steel makers globally and is a leading player in China’s home appliance and automotive steel market, and supplies steel for nuclear power, marine engineering, bridges and construction. It has annual revenue in excess of $40 billion and total assets of over $50 billion.

Koushik Chatterjee, chief financial officer of Tata Steel, said the transaction has been valued at 1.5 times the book value of the assets.

“The enterprise value is about $685 million, which include about $535 million of combined equity as a business and $150 million of debt. What we get for our share in the business is $327 million, plus if there are any adjustments at the closing level. Because of this transaction, there will be some deconsolidation of debt at the group level."

On Monday, shares of Tata Steel fell 1.55% to 445.65 on BSE, in line with the 1% decline in the benchmark Sensex.

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