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Tata Steel is beating a sensible retreat. After years of struggling, the Indian steelmaker is now exploring a sale of all of its UK business. Weak local demand and a flood of cheap imports have made the group's European arm much less attractive than its domestic operations. M&A opportunities at home may also prove more profitable than its ill-fated 2007 takeover of Corus.
A disposal of the UK operations, which employ around 15,000 people, would half-unwind Tata's expensive acquisition of its larger Anglo-Dutch rival almost a decade ago. It would also free the group from a business that has become a big drag.
Europe accounted for almost 60 per cent of the Indian-listed group's revenue in the three months to December. Yet at the EBITDA level, Tata's European business lost roughly $30 on each tonne of steel it sold. In India, it is earning less than before but still producing about $97 of EBITDA per tonne.
One reason for the big difference in profitability is that India has more aggressively protected local steelmakers against cheap Chinese supply through import duties. Overcapacity of the metal in the People's Republic is more than double total European Union demand of 155 million tonnes per year, according to the European Steel Association.
The carrying value of Tata's UK unit has been all but wiped out after several big impairment charges, and Tata says what value remains in the former Corus business is mostly attached to its healthier operations in the Netherlands. So it will not matter too much if potential buyers only pay a nominal value for the equity.
A sale will also help to contain Tata's ballooning borrowings. Europe accounts for most of the group's net debt, which stood at $11.3 billion at the end of December or more than 2.5 times its market value. It will also free up the top brass to focus more on opportunities closer to home where highly indebted groups like Essar, backed by the Ruia brothers, are looking for strategic partners.
Consolidation could make Tata's Indian operations even more profitable. So focusing on its own backyard makes sense.
(The author is a Reuters Breakingviews columnist. The views expressed are her own.)
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