Despite UK biz sale, Tata Steel says don't regret buying Corus

Even as the company has taken a bold move by putting up the assets of its UK business on the block, Tata Steel does not regret its 2007 decision to buy Corus at 6.2 billion euros.In an exclusive interview with CNBC-TV18, the company's Director, Koushik Chatterjee, said the company took the "strategic" decision to divest in the UK business in light of its grim financial condition and that it could not take any further impairments.The company's UK business was part of Corus, which has now been branded Tata Steel Europe.Chatterjee termed the sale as an effort to turn around the European business, which has strugged ever since Tata bought it out eight years back.The global steel industry, he added, was hurting from overproduction in China, which had caused a slump in commodity prices.Below is the transcript of Koushik Chatterjee\\'s interview with CNBC-TV18\\'s Kritika Saxena.Q: The question that everyone is asking is simply, is Tata Steel exiting UK operations or not?A: Fundamentally, if you look at the way we have looked at this is after supporting this business for a very long time, for 8-9 years, supporting in terms of restructuring, in terms of investments financially, we have taken a strategic view that the plan for the future looks very significantly inherent with risks. We have spent a lot of time yesterday at the board in stress testing the scenarios and the assumptions going forward because the market externalities in the UK have changed very significantly. The issue relating the over capacity which is facing the global steel industry has had a very deep impact on the steel industry in the UK and it is almost like a perfect storm. So, in that context, and the amount of support, and the asset impairments that we have taken, it was a strategic view, that we should look at all options which includes divestment relating to the UK business.Q: So, is this going to be a complete sale or complete divestment of the UK operations as a result of which, you will be withdrawing from UK completely?A: What we have said is that the Tata Steel Europe Board, which is the holding company of our European business, has to review all these options which includes the divestment options of Tata Steel UK in whole or in part. So, that answers that question.Q: That you are withdrawing completely out of UK?A: Effectively._PAGEBREAK_Q: So, let me then ask you, in terms of the minute clarity that is required, there is about 17.4 million tonne per annum that you have roughly across Europe, out of which roughly 10 million tonne is in UK. Can you break up for me what is the kind of valuation that these three plants in UK have at this point in time?A: There are some numbers that I need to clarify. It is not 17.5 million tonne per annum, it is more around 13 million tonne per annum.Q: That is across Europe, including Netherlands?A: That is correct. The UK numbers are more around 6-7 million tonne per annum because the capacity utilisations are different in different plants. At this point of time the nameplate capacities are a little higher but the effective capacity is much lower. Second point which is important to say is most of the UK asset is impaired so therefore it is not a valuation game. It is a question of actually reducing exposure for Tata Steel Group. So, that context is an important context because it is a strategic view in view of the fact that we have supported that business as a parent for a very long period of time. We have incurred asset impairments especially after the impact of the global financial crisis in 2008 and we got to therefore take a view whether you can commit capital for the near-term and the longer term. When you look at all the issues, we have taken a view which is almost kind of conclusive in that sense, that we cannot continue to support in the same form and therefore we should look at all restructuring options including an exit or a sale. Q: The Netherland part of the business, that is the European extended business, will not be sold?A: We are talking about Tata Steel UK which owns the UK footprint. Q: If you break up your UK operations, there is Port Talbot and then there are two more very crucial operations specifically with respect to Scunthorpe you have been looking out for a buyer for a while. You are in talks with Greybulls but haven’t found a definitive deal yet. Would it make sense when for one player to pick up the entire stock or would you look at three specific divestments? A: It is not three, it is two. So, the Greybull transaction is progressing at significant pace. There are the usual challenges of any M&A transaction which is getting stitched out as we progress. We are in conversation with the Greybull partners, we are in conversation with the government because we need the support of the government to do this transaction, to make it more sustainable. So, therefore that is a transaction which is already progressed very significantly. We have had significant support of the employees, unions and other stakeholders and I hope that that gets concluded. This one is a separate one which is we have decided only yesterday so we will have to setup the process and do it in a time bound manner.Q: So, in that case it would make better sense in terms of valuation as well to break it up and to sell each plant to different players?A: As I said it is not a valuation game. It is not a valuation exercise. We have impared the assets at both Scunthorpe as well as Port Talbot. So, it is a question of reducing strategic exposure given the way the fundamentals of the business are in that geography. So, given the fact that there is a long products transaction ongoing you certainly don\\'t want to unwind that given the pain and the effort that everybody has put in to bring it up to this stage. We just hope that we can close the remaining issues and cross the line.As far as Port Talbot is concerned or the rest of the UK is concerned because there are many sites other than Port Talbot also we will be looking at running a similar process perhaps a more tighter process but credible enough to evaluate anybody who is interested in this asset.Q: Just to clarify, there are two plants that are specifically on the block with respect to Tata Steel UK?A: Yes, if you include long products there are two integrated sites which is Scunthorpe which is a separate one which is already ongoing and then there is Port Talbot in Wales which is the hub. But apart from Port Talbot there are multiple other sites and there are other businesses which also forms part of this configuration. It is also important to say that Scunthorpe and Port Talbot are different in terms of products. So, one is purely a flat product business. The other one is longs and some of the flats in terms of semis and so on.So, these are two different hubs. So, one hub as far as Scunthorpe is concerned is already ongoing as far as the divestment process is concerned and the other one we will start the process as soon as possible.Q: Since we are talking about Scunthorpe the steel industry has been through very volatile time. The stake sale has been on for over 16 months now. One player that is Klesch who backed out which is when Greybull stepped in. The fact of the matter is that buyers are not willing to buy in a volatile market like this. Does that not worry you that it may put a sever hurdle in the various deals that you sign?A: At different points in time in the cycle there are different players or investors who have different risk appetite. So, even when we ran through the Scunthorpe proposal more specifically after Klesch\\'s transaction and the Klesch transaction didn\\'t happen out of a full blown process because there was an interest shown and we moved on that basis. But after that we really went for a structured process and we had three investors who were interested and we proceeded with one.So, at points in time there are different kinds of investors who have different risk appetites. Some come at different points in the cycle and if we have found something in Scunthorpe we would hope that there would similar or different kind of people who will find strategic and financial logic to come into Port Talbot too. That is our hope and that is the basis on which we will proceed with the sales transaction.Q: What is the timeline that you are looking at roughly?A: As I said that this has been only less than 24 hours as you said. So, we will have to set up the timeline. We will have to put in a process in place. M&A transactions can take very long, can take very short time. It depends on how tight we run and we propose to run it very tightly. As I said the board\\'s guidance to the European board is very clear. It has to be in a time bound manner. So, we will have to run that.Q: So, how long would this Scunthorpe deal take in that case?A: The Scunthorpe deal as I said has progressed, advanced very significantly. But there are challenges and issues which are normal in a running organisation because for example contracts which has to get innovated. There are various suppliers which have to be taken on board. So, those are the things that take time and that is being on the process at this point of time._PAGEBREAK_Q: In terms of cash burn that you have been seeing as a result of the UK operation, can you give me a sense on a per annum basis what is the kind of cash burn and what is the earnings before interest, taxes, depreciation and amortisation (EBITDA) tonne of the UK business at this point in time, how long will it keep impacting numbers?A: Our attempt is that it should not impact beyond a short period of time or a point of time. So, as I said I wouldn\\'t kind of stick my neck out, maybe after sometime when we have a better sense of how the process is going to get ruled. I would be in a better position because it is just less than 24 hours we got to set up the advisory team, we have got to set up the process. There is a lot of work to do and we will do in right earnest in cooperation with everybody.Q: You are in conversation with the UK government as well to ensure that there is a smooth transition for employees. What are the conversations and if the divestments don\\'t go through, what is the option then? Will you look at shutting down the operations altogether which will thereby lead to losses of several jobs?A: The conversation with the UK government has been an ongoing conversation because if you are part of an eco-system, you continuously talk to the government on various issues, we brief them on various issues and that is what we have been doing. I think we have made the government aware of the difficulties in the steel industry, the difficulties of the UK manufacturing situation.So, the government has been wanting to help in various ways and we have been in ongoing dialogues. So, that is a very constructive, open and a transparent communication that has been ongoing for some time. I don\\'t want to venture into what happens if the sale doesn\\'t happen because that is what the Tata Steel Europe board has to put their minds into. They have just got the mandate last night. So, they will have to as a body collectively look at all these options.We will have to put credible process from a sale perspective. If that doesn\\'t happen, what lies ahead is something that I can\\'t comment at this point of time. Q: The unions are not entirely happy. They are not completely happy about the issue. What is the stance that you are giving to assure them?A: It is natural. I would be surprised if anybody was happy. We are not happy either. It is a very agonising position because when you support a business, when you look at restructuring, when you look at all management initiatives, every worker in that site, every management employee of that site has given his or her heart and soul into turning it. However today the externalities of the business is so strong and so adverse, I think it is a global crisis as far as steel industry is concerned because one country has built up so much capacity and it is putting it out into the trade market that it causes existential problems for many countries.I saw an independent report that over the next few years each country will have to look at its own steel capacity and rationalise its own capacity based on what is more fundamentally needed and it will have to look at protecting its own industry against these imports.Q: Have you accepted the reality that you paid 6.2 billion pounds to acquire Corus. Have you accepted the reality that the amount that you will get in return as a result of the stake sale, the divestment will be significantly lesser?A: These are two different issues. Any business which gets into an expansion are based on premises of that particular time. I don\\'t think anybody in the world could predict global financial crisis of 2008. Decision makings and scenarios change and those fundamental assumptions have changed.So, there were two options in 2008, to say I leave the key and go out and second option is as strategic shareholders of a steel business we would try our best to give an effort to turn it around.There were hopes and there were efforts including resources - people, capital, technology, investments which have been put in. However today it is as I said an existential crisis for the steel industry given the macro movements. These movements can have debilitating impact. So, it is not a question of a decision at that point of time, it is what is the reality today.Q: Do you regret acquiring Corus?A: Not at all. It is a question of business strategy which has been followed. The developed markets at that point of time had very stable demand profile. India at that point of time had a much more volatile demand profile and setting up news capacities in India has always been very difficult. So, it was a question of trading and de-risking. There are many companies in many sectors who have gone and diversified on that basis. So, that was the premise.