When Ratan Tata made a £6.2-billion ($12.9 billion) winning bid for British steelmaker Corus Group Plc in 2007, the world saw it as an Indian firm acquiring a global footprint.
“Hopefully in future, people will look back and say that we did the right thing,” the then Tata Group chairman said while closing the landmark deal.
But fate proved otherwise. The deal hamstrung Tata Steel Ltd as the global steel industry buckled under low prices due to oversupply. World steel production doubled between 2000 and 2015, with China accounting for half of it. The first sign that Tata’s Corus buyout turned out to be a misstep came in 2013, six years after the deal, when Tata Steel announced a $1.6 billion impairment or goodwill write-off.
Tata Steel continued to bleed. On 29 March, it took a final call and decided to sell its UK operations, called Tata Steel Europe Ltd. The company said that it will consider various restructuring options, including a partial or full sale of its UK assets, putting in jeopardy nearly 15,000 jobs. Since the announcement to 8 April, Tata Steel stock fell 0.66%, while the benchmark Sensex fell 2.62% and BSE Metal Index dropped 1.73%.
On Monday, the $108-billion Tata Group will start on the long road of selling its loss-making UK steel business. Finding a new buyer may not be easy, say analysts, as the turnaround for the business is difficult.
The new buyer will assess not only the assets but also its legacy issues. Tata Steel’s UK assets comprise its Port Talbot steel plant along with some of its other related facilities.
“If it (turnaround) was that easy Tata Steel would have done it,” said Rakesh Arora, managing director of brokerage Macquarie Capital Securities India Pvt. Ltd. (Visitwww.macquarie.com/disclosures for disclosures.)
In his 6 April report on Tata Steel, Arora said the company’s UK assets have structural issues, such as high labour, energy and regulatory costs, that make them unviable over the long term.
There are legacy issues too. Four years before its sale to Tata Steel, Corus had just emerged from the verge of bankruptcy. And before that it was British Steel Corp. formed by nationalizing around 14 steel companies in July 1967.
According to Peter Brennan, editor (steel) at commodities information provider Platts, this makes for one of the primary issues with Tata’s British assets.
“Not all assets—the rolling line, finishing line, the smelter—are based in one location, which mean freight costs involved in coordinating between various facilities. This is a legacy issue from privatization and nationalization of assets,” Brennan said over a phone call on Friday.
Source: Mint