Tata Steel’s interest in buying Corus was first reported in October 2006. Now, almost 10 years later, the circle is complete — Tata Steel wants to sell the UK facility of Tata Steel Europe, the name that replaced ‘Corus’ after the acquisition was completed in 2007.
While in 2007, analysts and investors received the news of the acquisition with doubts and questions, they have welcomed Tata Steel’s latest move to sell the UK units. The Indian company loses a million pounds every day in the UK units. Even a company as big as Tata Steel, which clocked revenues of over ₹139,500 crore in 2015, can’t afford to keep such a loss-making unit.
This alone must have been a compelling reason for the Tata Steel Board, which met earlier this week in Mumbai, to finally pull the plug. Sensing the worst, the head of the UK labour union travelled to India to convince the Board members against such a move — but it was not to be.
First signs
The first signs of this inevitable turn came when Karl Koehler stepped down as the CEO of Tata Steel Europe in February.
The German professional had been at the helm of operations for five years, among the most tumultuous period for the world steel industry, during which sluggish demand, high costs and, of late, a deluge of cheap imports from China, made it almost impossible to turn around the UK business. And there were many issues within the company too. More on that later.
Though it was only this week that the board formally decided to pull back from a two-year turnaround plan for the UK units, Koehler, the architect of the plan, would have seen this coming. It was also made known that the new CEO of Tata Steel Europe would not have a seat on the board of the mother company.
Ego and bad timing
Rewind to 2006, and you couldn’t blame Ratan Tata and his men at Tata Steel for having global ambitions. After all, a small-time trader (LN Mittal) had risen from his backyard in Kolkata to become the largest steelmaker in the world. Tata Steel had a proud 100-year-old legacy.
So, what went against Tata Steel in its endeavour to become one of the largest steelmakers in the world?
First, it overpaid for Corus. A struggling steelmaker by 2006, the erstwhile jewel of the British Crown was in a bad shape, saddled by a legacy that included huge manpower, a weak business model, and no links to raw materials.
By initial estimates, Tata Steel could have paid much less than $10 billion for Corus. But, forced into a bidding match by Brazil’s CSN, which also wanted to acquire Corus, Tata Steel went for the kill.
Egged on by Ratan Tata, who wanted to leave a mark on the company (his tenure as the Tata Sons Chairman was nearing completion), Tata Steel bit off more than it could chew. Though Tata Steel’s final bid for Corus was only five pence a share more than CSN’s, the price was much higher than what the Indian company had bargained for — the final price tag of $13 billion remains the biggest acquisition for an Indian company.
Unfortunately for Tata Steel, the timing of the acquisition couldn’t have been worse. By the time Corus was in Tata Steel’s bag, the commodity cycle was beginning to peak. In no time, demand slumped and prices of steel plummeted as the local industry in China, the world’s biggest, cooled.
If the Tata Steel management in India was helpless about the external environment, they have no similar excuse for the troubles within Tata Steel Europe. The European unit is a diverse organisation, with its Dutch arm being the most profitable. While the steel made in the Dutch unit was sold to the lucrative automobile industry, the UK mills product was meant for the sluggish construction sector. Even as the Dutch units continued to get investments to upgrade, the UK mills were ignored.
Culturally, too, there were differences between the UK and Netherlands units. Koehler, who was the third CEO in three years when he took over in 2010, was expected to lead a turnaround. But, instead of aligning the whole organisation, the German CEO’s term was highlighted by a communication gap. Key personnel quit and labour unions were perennially unhappy. The post-acquisition integration never really materialised.
Searching for a messiah
A little bird tells me that a German steel company, for which Koehler once worked, is interested in buying the Dutch mills of Tata Steel Europe. But there’s a problem — the Dutch facility is not even for sale!
Tata Steel wants to sell the troublesome UK units but intends to keep the Dutch mills. Few suitors, especially steelmakers, will be interested in such a deal. A sweetener, in the form of the facilities in the Netherlands, might evoke more interest. Koushik Chatterjee, Executive Director of Tata Steel, told a business daily that the company is talking to three potential buyers.
It will be interesting to see who these suitors are; they are most likely to be similar to the profile of Greybull Capital. The investment firm with a taste for turning around assets is in talks with Tata Steel to buy the long steel division in the UK.
Even if Tata Steel does manage to get a buyer, the valuation would be something to look out for. Surely, it won’t be anywhere close to the 608 pence per share that Tata Steel paid for Corus in 2007.