The investment firm Greybull Capital will buy Tata Steel's long products Europe division in Scunthorpe in northern England, which employs 4,400 workers.
The sale of Tata Steel's long products Europe business to investment firm Greybull Capital LLP will help the company to lower cash burn and will be credit positive, says India Ratings and Research (Ind-Ra).
Greybull Capital will buy Tata Steel's long products Europe division in Scunthorpe in northern England, which employs 4,400 workers.
The deal for the Scunthorpe plant, which Tata had been trying to sell since 2014 before revealing talks with Greybull was underway in December and is expected to complete in eight weeks subject to certain conditions being met.
The sale to Greybull - for a nominal pound or 1 euro - includes a 400 million pound ($570 million or nearly Rs 3,792.1 crore) investment and financing package for the Scunthorpe business, as well as agreements with suppliers and unions on cutting costs.
"Ind-Ra, however, expects that the uncertain timelines associated with the sale of the overall loss-making UK steel business may delay the expected recovery in its credit profile," Sudarshan Shreenivas, Director, India Ratings and Research said in a research note.
The sale includes UK-based assets including the Scrunthorpe steelworks, two mills in Teesside, an engineering workshop in Workington, a design consultancy in York, and associated distribution facilities, as well as a mill in northern France, Tata Steel said in a statement on April 11.
Once the deal is completed, the maintenance capital expenditure (Capex) of Tata Steel's Europe unit will also decline significantly.
"Ind-Ra's rating view on the company is on a consolidated basis and the rating approach factors in a one-notch uplift for its strong operational and strategic linkages with the Tata Group," Shreenivas said.
Tata Steel's complete exit from the UK business will improve its earnings in the overseas operations and will also enhance its long-term cash flow.
"The complete exit from UK can translate into positive earnings before interest, taxes, depreciation and amortisation (EBITDA) profits in the overseas operations and improve long-term cash flow visibility," cited Shreenivas in a note.
While leverage levels are unlikely to see any direct reduction from the sale of the long products Europe business, its EBITDA losses from the region will be curtailed, which will facilitate gradual deleveraging of the company, Ind-Ra said.
The European operations of Tata Steel had reported EBITDA loss of Rs 3.39 billion during the period between April-December 2015, mainly on account of its loss-making UK operations.
Tata Steel's UK assets have a combined steel making capacity of around 10.2 million tonnes, which is spread across its Port Talbort, Scunthorpe, and Rotherham plants.
"The sale for a nominal consideration would be in exchange for Greybull Capital taking on the whole of the business, including assets and relevant liabilities, and securing an appropriate funding package," Tata Steel said in its statement last week.
According to Ind-Ra, the “Sale and Purchase” agreement that Tata Steel has now signed covers primarily around 4.5 million tonnes long steel products facility at Scunthorpe and other associated long products facilities in the UK.
Within Tata Steel’s portfolio of European assets, these facilities were the least profitable, and hence, the divestment of these is positive, it added.
The European region, which includes UK and Netherlands, accounts for 52% of Tata Steel’s total revenues in FY15.
The sale of UK operations will enhance margin and profitability of the Tata Steel Europe company which will ultimately enhance its credit profile.
"After the sale of UK assets, Tata Steel Europe (TSE) will consist primarily of the highly efficient and moderately profitable facility in the Netherlands, leading to a sharp improvement in TSE’s margin and profitability, providing an improvement in credit profile in the long-term," cited Shreenivas in a note.
"The deal with Greybull Capital will be completed once the outstanding conditions have been resolved, including a transfer of contracts, certain government approvals and satisfactory completion of financing arrangements," he said.
Greybull, which is not taking on pension liabilities, said about half of the 400 million pound package would come from shareholders of Greybull and half from banks and government loans.
The ratings agency noted that the concern remains as far as the main UK pension fund deficit is concerned, which expanded to GB pound 485 million as of 31 March 2015.
(With agency inputs)
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