Tata Steel on Monday said it will exit majority equity stakes in its Southeast Asia businesses, which will fetch it $327 million.
Tata Steel, through its indirect wholly-owned subsidiary TS Global Holdings (TSGH), has executed definitive agreements with an entity controlled by the state-owned Chinese enterprise HBIS Group (HBIS) to pest its equity stake in NatSteel Holdings and Tata Steel (Thailand) Public Company. HBIS is the second-largest steel producer in China.
Tata Steel held 100 per cent stake in NatSteel, while it has 67 per cent in Tata Steel Thailand. NatSteel has annual production capacity of over 2 million tonne, while the Thai business has finished goods capacity of about 1.7 million tonne, company websites show. "As per the agreement, the pestment will be made to a company in which 70 per cent equity shares will be held by an entity controlled by HBIS and 30 per cent will be held by TSGH," company said in a statement. The agreements were signed on Monday in Beijing, China.
In July 2018, company's chairman N Chandrasekaran had told shareholders at its annual general meeting that the firm would be looking at options to "simplify" its sub-scale and non-core assets. With the Southeast Asia businesses under pressure, it was widely speculated that as part of the strategy to prune non-scalable operations, these businesses would be exited as Tata Steel continues focus on domestic market.
The Southeast Asia operations of the company have remained under pressure due to higher scrap prices in the region. The Ebitda (earnings before interest, tax, depreciation and amortisation) for the three months ended September 30, 2018 declined 17 per cent y-o-y to Rs 112 crore. For FY18, the Ebitda stood at Rs 437 crore, which is just about 2 per cent of the consolidated Ebitda of Rs 22,045 crore for Tata Steel.
Speaking on the deal, Koushik Chatterjee, group executive director (finance and corporate), said, on a conference call, that the enterprise value of the new entity will be to the tune of $685 million, which includes about $150 million of debt. The stake sale has been struck at 1.5 times the book value of the assets subject to closing adjustments, he said, adding that Tata Steel's share from the deal is $327 million in cash.
This deal will also further Tata Steel's plans of pruning its consolidated balance sheet. As a result of the deal, Chatterjee said: "About $450 million goes off our books, so the debt will come down by roughly Rs 3,800 crore". He said of the $450 million, the proceeds of $327 million will be used for deleveraging of balance sheet and about $120 million of debt in the Southeast Asia, which was part of Tata Steel's consolidated debt. Tata Steel consolidated debt as on September 30, 2018, stood at Rs 1.18 lakh crore. The deal will be completed in two months, he said.
TV Narendran, MD & CEO, Tata Steel, said that the talks on the deal were on for the last couple of months. On the point of retaining 30 per cent stake, he said the reason the company felt was that it could cash on any of the benefits that will accrue as a result of the partnership with HBIS. "We will hold on to this 30 per cent stake for about three years, and will wait for an upside before exiting the new entity," he said.
An initial public offering, among others, are options that may be considered for an exit after three years. Tata Steel will have two management positions in the new entity, while the name of the new firm will be decided by HBIS. Tata Steel has been expanding its India footprint and decreasing overseas, and intends to double its domestic capacity in the next five years. The company has picked up assets under the NCLT process. The company is also in the process of merging its European operations with Thyssenkrupp. Tata Steel posted a net profit of Rs 3,116 crore for the July-September 2018 period. -FE