The collapse of Tata Steel Ltd.’s planned joint venture with Thyssenkrupp AG has brought the Indian group’s more than $13 billion of debt in focus, with no immediate prospect of its European unit being hived off.
The deal would have transferred some of the debt to the joint venture, allowing the Mumbai-based company to sharpen its focus on ramping up its Indian business. Tata’s European operations have debt of 2.2 billion euros (Dh45.91 billion; $2.5 billion) and the joint venture was an “important strategic initiative” to create a sustainable portfolio in Europe, the company said Friday. The company’s group debt stood at $13.15 billion as of March end, the highest among Indian steelmakers.
“With the joint venture off the table now, the big story of deleveraging of the consolidated balance sheet will no longer be valid,” Vishal Chandak, an analyst at Emkay Global Financial Services, said in a report. However, the end of the merger is not the end of the road for Tata as it will continue with its plans to repay $1 billion of debt announced last month and invest in growth in India, he said.
Tata has been trying to find a solution for its European business since being hit by the 2016 commodity crisis, though many of its troubles stem from before then. The Indian steelmaker bought Corus Group Plc for about $13 billion in 2007 to gain control of its European units, but has been closing and selling plants in the UK since the 2008 financial crisis to make the business more profitable. The collapse of the planned joint venture comes at a time when Europe’s steelmakers are facing headwinds from weak demand from carmakers and high imports.
Thyssenkrupp and Tata had offered concessions to regulators earlier this year to win antitrust approval for the European joint venture, including selling plants in Belgium, Spain and the UK. The companies said Friday that offering further concessions would have undermined the business case for the deal. With increasing likelihood of the venture not being approved by the European Commission, the two companies abandoned the merger.
“We are going to focus on deleveraging even more,” Chief Financial Officer Koushik Chatterjee said on a call Friday. “We are also going to look at other assets sales, whatever we have in the portfolio.”
Tata Steel is shifting its focus to India, where a government-led thrust on infrastructure is supporting demand. Plans are underway to double capacity in five years through expansions at existing mills and acquiring indebted domestic mills.
“The unwinding of a multi-year effort, leads back to the original questions of sustainability and leverage,” ICICI Securities Ltd.’s analysts Abhijit Mitra and Rohan Jain said in a report. “Over the longer run, management perhaps can execute its India focus, but in the near run as European outlook weakens, the event will be a drag on group profitability as well as leverage.”
The brokerage downgraded the stock to sell from hold with a target of 411 rupees ($5.84). Shares of the company fell as much as 3.1% to 471.60 rupees following a 6.2% fall Friday after the deal with Thyssenkrupp fell through.
“Tata Steel could find it difficult to divest Tata Steel Europe in the near term in view of the European Commission’s approach to same geography mergers of such a scale,” Edelweiss Securities Ltd.’s analysts including Amit Dixit wrote in a report. Additionally, with the European business back in Tata’s fold, there is an expectation that the profitable domestic operations may have to support Tata Steel Europe.