Why the failure of Tata Steel’s strategic sale deals could be a boon in disguise

Satya Sontanam | Updated on August 07, 2019

File photo   -  Arunangsu Roy Chowdhury

Tata Steel said it will not sell its South-East Asian operations to a Chinese company

BL Research Bureau

Tata Steel’s attempts to reshape the company by focussing exclusively on the Indian operations by divesting non-core overseas businesses has met yet another hurdle.

On Tuesday, the company had announced that its plan to sell-off its South-East Asian operations to Chinese HBIS was terminated.

The company, on Tuesday, announced that the sale deal, entered with Chinese HBIS, to sell-off the stake in South-East Asian operations, was terminated.

This is the second setback after the European Commission rejected the plan to merge its European operations with the German conglomerate, thyssenkrupp AG.

The company’s inability to complete these strategic sales, may however work in its favour. Given the weak domestic outlook for the steel sector, presence in overseas markets could help Tata Steel’sconsolidated earnings.

What happened?

South-East Asian businesses - NatSteel Holdings at Singapore and Tata Steel (Thailand) Public Company - have been delivering weak performance in the last few years.

While the aggregate revenue from the segment contributes close to 7-10 per cent to the group, the operating profit and the net profit contribution is miniscule.

This is due to the sluggishness in the demand for steel on account of weak construction activity in both Singapore and Thailand over the past few years.

For FY19, a loss of Rs 89 crore was reported from this segment against the profit of about Rs 141 crore in the previous year.

Experts had hailed the company’s decision, in January 2019, to withdraw from the less profitable South-East Asian operations.This would have resulted in greater focus on the Indian market; which had a better growth outlook.

On January 28, 2019, T S Global Holdings, an indirect wholly-owned subsidiary of the Tata Steel, had entered into a definitive agreement with HBIS Group, to divest its equity stake in Tata Steel (Thailand) Public Company and NatSteel Holdings. The stake was to be sold to a new company that would be governed by HBIS and Tata Steel. Tata Steel was expected to hold 30 per cent of the equity of the resultant company.

Post sale, assets worth Rs 4,139.45 crore and liabilities worth Rs 1,426 crore were expected to move off-the consolidated balance sheet of Tata Steel.

The deal was likely to have boosted Tata Steel’s South-East Asian business as it could then have had access to resources, technical expertise and regional understanding of HBIS.

However, the deal will never see the light of the day as HBIS couldn’t obtain the Hebei Government’s approvals, one of the key conditions for the proposed transaction.

Thus, both parties have, therefore, decided not to extend the definitive agreements. But Tata Steel states that the company is set to begin its attempts to find another investor to find a partner for the South-East Asian business.

Is this a silver lining?

These setbacks could also be seen as boon in disguise by Tata Steel. As the demand in the domestic market, too looks bleak, presence in overseas market could help the company reduce risk somewhat through diversification.

This could be an opportunity to the company to review the demand in both, the domestic and global market, evaluate whether to turnaround the overseas operations or to stick to its strategy of focussing entirely on the Indian market.

Published on August 07, 2019

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