As Britain prepares to leave the common economic bloc in Europe, the steelmaker expects No 10’s support for revival of the Port Talbot plant.
“The government will be keen to revive economic activity post Brexit in the UK. Around 60% of steel consumed by automakers in the UK is supplied by Tata Steel’s Port Talbot… We believe that the government will encourage us to support the value chain,” Tata Steel managing director T.V. Narendran said in a media interaction.
Tata Steel on Friday said that the company is in talks with Sweden-based steelmaker, SSAB, for the potential sale of Tata Steel’s Netherland business, including the Ijmuiden Steelworks.
Tata Steel has about 7.5 million tonnes per annum (mtpa) of steel-making capacity at its IJmuiden Steelworks in the Netherlands and another 3 mtpa at Port Talbot in the UK.
“Based on the discussions initiated by SSAB Sweden regarding a potential acquisition of Tata Steel’s Netherlands business, we will undertake a due process and move to the next stages, including consultation and due diligence,” said Tata Steel’s chief financial officer, Koushik Chatterjee.
The deal is expected to close in six-nine months; however the company will be able to access the value and complete the due diligence process by January 2021.
The reason to sell the Dutch unit which was reporting steady profits and not the loss-making Port Talbot plant is in line with the company’s objective to deleverage, said Narendran.
“The reason why we took this call primarily is that there was an interest for the Netherlands unit and it was in line with our objective to deleverage. Value to be got from this proposed transaction will be helpful in making the Port Talbot unit self-sustaining,” said Narendran.
Analysts tracking the company have also found this strategy a positive for the company.
“While the Street is a tad disappointed on the proposed divestment not including Port Talbot’s UK operations, we believe it will be a game changer for the company due to the possibility of better cash proceeds as the Netherland unit is one of the most profitable assets in Europe,” said Edelweiss’ assistant vice president Amit A. Dixit in a report.
The sale is likely to aid around Rs 60-180 per share in terms of equity value.
“Assuming EV/EBITDA of 6x (comparable for European peers), potential EV for the transaction could be US$2-2.8bn. Under different assumptions for UK business profitability, this transaction could add equity value of Rs60-180/share in our bull case scenario,” said a report by Morgan Stanley.
Tata Steel reported a consolidated net profit after three quarters at Rs 1,665.07 crore for the September quarter.
“We are very bullish on demand for Q3 and Q4 as we see the steel sector is reviving and it is also traditionally a good quarter for steel. The Q2 recovery was led more by the rural market,” said Narendran.