Course Correction

Cyrus Mistry, Tata group chairman, has embarked on a costly correction to reverse the misfortune of the group’s steel business. Tata Steel, which acquired Corus (four times its size) in 2007, is in discussion with Geneva-based Klesch group to sell off its long products business in Europe. More than the sell-off, the interest around the deal is in its valuation and the return on investment for Tata Steel.

 

The division, which employs 20 per cent of Tata Steel’s workforce in Europe (6,500 workers), constitutes 25 per cent of Tata Steel Europe’s operations. Investment bankers value it at around $1.2 billion. Considering the acquisition value of Tata Steel, the present deal would be a loss-making proposition.

 

The most-celebrated $12 billion acquisition, the largest by an Indian company, of Corus Plc in 2007 turned into a financial burden for the high-performing Tata Steel soon after the global recession began. The company, which reported Rs 12,321 crore of consolidated profit in 2007-08, posted a Rs 2,120 crore loss in 2009-10 and recovered only in 2013-14 with a profit of Rs 3,663 crore.

 

While rating agencies are pleased with Tata Steel’s exit from long products assets, analysts see it as an act that proves that the steelmaker went overboard in its pursuit to become one of the top steel makers in the world. Under Ratan Tata’s leadership, the firm had outbid Brazilian steelmaker CSN to emerge as the world’s fifth largest steelmaker from 56th.

 

Vinayak S. Bapat, president and CEO of VXL Consulting, says the entire acquisition play had gone awry. “Now they are trying to make the most of a bad decision.” He draws a parallel with Hindalco’s acquisition of Novelis, which turned profitable by shipping the ‘can’ making unit to India. Tata Steel Europe could have tried such models by making pellets in India, says Bapat.

 

As deflation risks suppress European markets, analysts fear the Tata-Klesch deal might end up as a distress sale for Tata Steel. Sanjay Jain, analyst, Motilal Oswal Securities says the long products business in Europe is like a house that spends more on its maintenance than it earns through rent.

 

Besides, Tata Steel has poured in an additional £1.2 billion in the UK operations after the $12-billion deal. Seven-and-a-half years since the acquisition as it prepares to sell assets, it faces opposition from workers’ unions also. “Tata Steel has not been able to bring this asset up to the mark despite investment and restructuring,” a Motilal Oswal report says.

 

The only positive for Tata Steel while bargaining for a better value is that the cost of setting up a similar greenfield long product’s capacity would be over $3 billion. 

 

(This story was published in BW | Businessworld Issue Dated 01-12-2014)