In a massive setback to Tata Steel’s plans of finding a permanent solution to the woes faced by its European operations for years, the company said on Friday that a proposed merger of its European operations with those of German conglomerate Thyssenkrupp was unlikely to proceed, as the deal failed to pass muster with the local antitrust regulator.
In June 2018, Tata Steel and Thyssenkrupp had entered into an agreement to create a 50:50 joint venture by combining their respective steelmaking operations in Europe. The deal, if successful, would have seen the creation of the second largest steel company in the continent after ArcelorMittal. This would have also allowed Tata Steel to move around $3 billion of debt off its books.
However, the European Commission had earlier raised a red flag to the deal in its original form due to antitrust concerns. Tata Steel and Thyssenkrupp offered some remedial measures for the consideration of the Commission, but it appears that the regulator wanted further concessions to be made which the two companies are unwilling to do.
“The Commission today discussed the proposed joint venture with both Thyssenkrupp and Tata Steel. Based on the feedback from the Commission, it is increasingly clear that the Commission is not intending to clear the proposed joint venture as it expects substantial remedies in the form of sale of assets of the proposed venture,” read a statement issued by Tata Steel to the bourses on Friday.
“In the view of Thyssenkrupp and Tata Steel, further commitments or improvements to the remedy package would adversely affect the basic foundation of the proposed joint venture and the intended synergies arising from the merger to such an extent that the economic logic of the joint venture would no longer be valid and its fundamental sustainability would be severely impacted.”
The statement further added that the two partners can, therefore, offer no further remedies and assumed that the Commission would not approve the joint venture.
Tata Steel’s share prices crashed 6.10% to close at ₹487.30 per share on the BSE on Friday. The bourse’s benchmark index, the S&P BSE Sensex lost 0.26% on the same day to end at 37,462.99 points.
Speaking to reporters over a conference call, Koushik Chatterjee, executive director and chief financial officer of Tata Steel, said that the company would continue to look for an end state strategy for Tata Steel Europe, including other strategic alternatives. “The idea was to deleverage the consolidated balance sheet and we won’t move away from that. The pursuit of that strategy would continue,” Chatterjee said.
Tata Steel Europe’s operations have been struggling for years as it suffered first from a slowdown in the Eurozone economy which impacted the demand for steel, and then faced an onslaught from cheap Chinese steel imports. In FY2019, Tata Steel Europe posted total revenue from operations of ₹64,777 crore and an Ebitda (earnings before interest, tax, depreciation and amortisation) of ₹5,414 crore.
On a consolidated basis, Tata Steel reported total operating revenue of ₹1.57 lakh crore in FY2019, up 27% year-on-year. The company’s net profit in the same period declined 49% to ₹9,098 crore. The company had a consolidated net debt of close to ₹95,000 crore as on March 31, 2019.
Given the international challenges that Tata Steel has faced in markets like Europe and Thailand in the past, the company has now decided to singularly focus on growing in India, primarily on the back of greenfield expansion at Kalinganagar in Odisha. “Currently around two-third of the business of Tata Steel is India-based with best-in-class competitiveness and a focused growth strategy. With the commissioning of the 5 million tonnes per annum-phase II of Kalinganagar in the next 30 months with value added product mix, Tata Steel’s share of business (from India) along with its profitability will increase further,” Tata Steel’s statement issued on Friday said.
The company also spent a significant quantum of capital to acquire the steelmaking assets of Bhushan Steel and Usha Martin through an asset sale programme under the Insolvency and Bankruptcy Code, for close to ₹40,000 crore. This is expected to further bolster Tata Steel’s presence in India.
At a time when Tata Steel is doubling down on India by investing heavily in creating domestic capacity in a country where steel demand is expected to rise concurrently with economic and infrastructure growth, the company would have hoped to cut its struggling European operations loose and be in a better financial position. With the deal with Thyssenkrupp all but dead, the senior leadership at the steelmaker will have to think out-of-the-box to find an answer to its European woes.
