Tata Steel’s Euro­pean ad­ven­ture: Act II

Mint Asia ST - - Otherviews -

At the very least, the sep­a­ra­tion of the Bri­tish Steel Pen­sion Scheme (BSPS) from Tata Steel UK Ltd should lighten the bur­den of fund­ing its legacy pen­sion li­a­bil­i­ties. The best sce­nario for Tata Steel Ltd is if its Euro­pean busi­ness (of which Tata Steel UK is a part) com­bines with Thyssenkrupp AG’S steel busi­ness. The sep­a­ra­tion re­moves a key ob­sta­cle to the trans­ac­tion.

That is why Tata Steel’s shares were up by 3.3% on Tues­day, when it dis­closed that the UK pen­sion reg­u­la­tor has ap­proved the sep­a­ra­tion of BSPS from Tata Steel UK and a num­ber of as­so­ci­ated firms.

What hap­pens now? Tata Steel has paid £530mil­lion or Rs4,640 crore to BSPS and also a 33% stake in Tata Steel UK to BSPS. Now, its mem­bers have to de­cide by De­cem­ber 2017 if they want to re­main with BSPS or shift to a new scheme to be launched by Tata Steel UK. De­pend­ing on the split, the pen­sion as­sets will be di­vided. This should be known by the end of the cur­rent fis­cal year. Un­der the new scheme, the an­nual in­crease in pen­sions is lower, mak­ing it eas­ier to man­age.

The pay­ment made to BSPS will re­flect in the Septem­ber quar­ter re­sults, as an ex­cep­tional item. The al­lo­ca­tion of a 33% stake also means a mi­nor­ity in­ter­est is cre­ated to that ex­tent, and should lead to a shar­ing of losses and prof­its of Tata Steel UK. This will ac­cord­ingly af­fect the con­sol­i­dated profit of Tata Steel as well. Clar­ity on both as­pects should be vis­i­ble in the Septem­ber quar­ter re­sults.

A more man­age­able UK pen­sion obli­ga­tion by it­self is good news for Tata Steel. Whether the Thyssenkrupp trans­ac­tion it­self pro­ceeds is another is­sue. Cer­tainly, the pen­sion li­a­bil­ity was one ques­tion that has been set­tled. But there are oth­ers. The busi­ness en­vi­ron­ment has changed con­sid­er­ably since the time Tata Steel be­gan to ex­plore strate­gic op­tions for the Euro­pean busi­ness. Steel prices have picked up and, helped along by its re­struc­tur­ing, prof­itabil­ity has im­proved in the UK and Europe. Both par­ties can there­fore bar­gain from a po­si­tion of strength. Thyssenkrupp’s man­age­ment com­men­tary sug- STAND­ING TALL Tata Steel has beaten the broad mar­ket by a wide mar­gin in the past three months. 140 130 120 110 100 90 12 Jun Tata Steel Sen­sex 12 Sep gests it is in favour of a com­bi­na­tion.

An ac­tivist in­vestor Ce­vian Cap­i­tal, with a 15% stake in ThyssenKrupp and with a seat on its su­per­vi­sory board, is op­posed to the com­bi­na­tion, ac­cord­ing to an 11 Septem­ber Bloomberg re­port. It and some other mem­bers favour a spin-off of the com­pany’s non-steel as­sets. Ei­ther way, a de­ci­sion is likely by the last week of Septem­ber, ac­cord­ing to the re­port, and when that hap­pens, the way for­ward for Tata Steel’s Euro­pean busi­ness will be­come vis­i­ble.

If they in­deed de­cide to com­bine, then the struc­ture and the po­ten­tial ben­e­fits for Tata Steel will need to be eval­u­ated. If ThyssenKrupp’s board de­cides against the com­bi­na­tion, in­vestors could see it as a neg­a­tive for Tata Steel, as its val­u­a­tions seem to fac­tor in the like­li­hood of a com­bi­na­tion.

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