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Tata Steel may go for distress sale of Euro ops, view experts

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Tata Steel's decision to sell its long products steel business spread across Europe to Switzerland-based Klesch Group has been viewed positively by experts and analysts. Although the proposal is still at a discussion stage, analysts, however, are hoping that the deal by Tata Steel would not be a distress sale as seen in other recent European deals.

Klesch Group is global industrial company that acquires commodity producing companies, and cuts risk of operations through commodity trading strategies.

"This move is certainly in a positive direction. Dismal performance of long product operations has been a constant worry for the company. Also there were no indication for strong revival in the market for long products. How much valuation they are able to get for this business and settlement of workers would be the key thing to watch out for," said Gautham Chakraborthy, senior analyst with Emkay Global Financial.

Another analyst from leading brokerage on condition of anonymity pointed that following prolonged slowdown in Europe several steel plants are available for sale at rock-bottom prices. "We can only hope that Tata Steel's long product operation deal is not a distress sale," he added. Recently another domestic steel player has made an offer to buy Italy's troubled steelmaker Lucchini's 2.5 million tonne steel plant for less than $100 million, which most analyst considered as dirt cheap price.

"If you are setting up a greenfield steel plant, as a thumb rule $1 billion needs to be invested for per million tonne of facility. Tata Steel is unlikely to get this kind of valuation, even if they get half of this it should be good," the analyst said.

Giriraj Daga, an analyst with Nirmal Bang said $1 billion should be a good price for the company's 4 mt long product facilities of the company.

Tata Steel had acquired erstwhile Corus for $13.7 billion in 2007, but European operations came under pressure thereafter following a credit squeeze post Lehman crisis and the subsequent European debt turmoil. Tata Steel has invested £1.2 billion in its UK operations and trained 1,200 apprentices and graduates since acquiring Corus in 2007.

Tata Steel Europe has gone through many restructuring programmes over the past three years involving job cuts across facilities in the UK to maintain competitiveness, as steel demand in the European region stayed weak. Several of of this job cuts were for restructuring of long product operations which have been making huge losses.

Tata Group company's MOU covers several UK-based assets, including Scunthorpe steelworks, mills in Teesside, Dalzell and Clydebridge in Scotland, an engineering workshop in Workington and a rail consultancy in York, as well as other operations in France and Germany. About 6,500 people are employed at long products Europe and its distribution facilities. Tata Steel employs 30,500 people across Europe, including 17,500 in the UK.

"Karl Koehler, chief executive of Tata Steel's European operations, said: "We will now move into detailed due diligence and negotiations, though no assurance can be given about the outcome."

Explaining the context and rationale for this decision, Koehler said, "We've improved the competitiveness of Tata Steel's European operations, including Long Products Europe which now supplies more of the innovative steel rail, rod, plate, sections and special profile products demanded by customers....We have therefore decided to concentrate our resources mainly on our strip products activities, where we have greater cross-European production and technological synergies.

We want to build a sustainable business in the UK and further develop our mainland Europe business and we are committed to providing the necessary leadership and financial resources to achieve that."

"Although this is a positive development for the company, ideally it should not bring rating of price upgrades for the stock yet until more details on valuation and further course of action is revealed by the company," Chakraborthy said.

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