Tata Steel looks for Europe JV, analysts see talks with Thyssenkrupp

Mumbai: Tata Steel in an announcement made late Friday evening revealed an alternate plan to look for a joint venture partner for its entire European business as sale talks for its UK assets hit a roadblock due to Brexit (Britain’s decision to exit the European Union).

On 30 March, Tata Steel said it will exit completely from its UK steel assets in a bid to cut losses. This was followed by a sale process, and on 9 May, the company said it has shortlisted seven bidders interested in buying all of its UK steel assets. However, the deal process hit a roadblock as Britain voted to leave the European Union. Europe markets contribute significantly to Tata Steel UK’s sales volumes and now there is uncertainty over new trade policies between the UK and Europe.

In Monday’s early morning trade, Tata Steel stocks reacted positively to the decision. At 9.38am, Tata Steel Ltd was trading at Rs.322.20 on BSE, 1.1% up from previous close, while India’s benchmark Sensex index rose 1.7% to 27,590.47 points.

After a board meeting on Friday, Tata Steel said it had decided to evaluate “alternative and more sustainable” solutions for the European business. “Consequently, Tata Steel has now entered into discussions with strategic players in the steel industry including Thyssenkrupp AG,” the statement issued late on Friday night said. The company said discussions have been started for a JV, however, deal talks are at a preliminary stage.

Street view on Tata Steel’s latest decision has been a mixed bag. However, most believe joint venture with Thyssenkrupp would be significant to watch for.

“Brexit has possibly impacted prospects of sale of Port Talbot steel plant in the UK. Tata now exploring possibility of JV with another steel player, such as Thyssenkrupp. Believe this is incrementally negative as a JV would only partly reduce UK exposure,” foreign brokerage firm CLSA said in its note on Monday. Port Talbot is Tata Steel’s main steel making facility in the UK. The brokerage maintained a sell on the stock.

Certain other brokerages like Credit Suisse expect an upside on the stock if deal talks fructify. “While talks still at preliminary stage, this could create an upside for the stock,” Credit Suisse said in its note on Monday. In the note, the brokerage added that joint venture synergies with Thyssenkrupp could be at $550 million.

To be sure, the company is likely to continue sale talks for its UK steel assets in parts, in parallel to its fresh attempts to find a joint venture partner for the entire Europe business, including the UK assets. However, the sale for UK assets may take longer on account of uncertainties over Brexit and its implications.

“Believe slow progress on UK sale is more or less priced in,” Credit Suisse said in its note. The brokerage maintained outperform on the stock.

Domestic brokerage firm Religare Capital also sees the development as a positive for the company. “The JV indeed may have the synergy benefits,” said Pritesh Jani, analyst, Religare Capital Markets Ltd, in an email note on Monday.

“The joint venture success just like the sale success will depend on outcome on British Steel Pension Scheme (BSPS), discussions with UK trade unions, support from UK government. The interesting thing (is) will the UK govt. under current circumstances for 1,30,000 employees under the BSPS scheme change the pension rules (for a single company) so that it helps a German company, ThyssenKrupp?” Jani asked in the note, adding that it will be a long-drawn process.

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