Tata Steel Ltd, India’s largest steel company by revenues, has signed a memorandum of understanding (MoU) with Geneva-headquartered The Klesch Group to sell its long products business in Europe and associated distribution activities for an undisclosed amount, the company said on Wednesday.
The deal is expected to be completed in the first half of 2015.
It includes the sale of UK-based assets including Tata Steel's Scunthorpe steelworks, mills in Teesside, Dalzell and Clydebridge in Scotland, an engineering workshop in Workington and a rail consultancy in York, as well as other operations in France and Germany.
The firm's long products business in the continent comprises a wide range of standard and differentiated products including sections, rails, wire rods, special profiles and plates for the rail, yellow goods, energy and construction sectors. It employs around 6,500 people of the total 30,500 people working for Tata Steel in Europe and currently produces around 3 million tonnes with the capacity to produce up to 5 million tonnes, annually.
"We will now move into detailed due diligence and negotiations, though no assurance can be given about the outcome. We will regularly engage with our employees and other stakeholders throughout this process, and we will consult with the trade union representatives and work councils," said Karl Koehler, chief executive of Tata Steel's European operations.
Explaining the rationale behind selling the business, Koehler said, "We've improved the competitiveness of Tata Steel's European operations, including Long Products Europe which now supplies more of the innovative steel rail, rod, plate, sections and special profile products demanded by customers."
"We have therefore decided to concentrate our resources mainly on our strip products activities, where we have greater cross-European production and technological synergies. We want to build a sustainable business in the UK and further develop our mainland Europe business and we are committed to providing the necessary leadership and financial resources to achieve that," he added.
Tata Steel catapulted to become the fifth-largest steel producer with large operations in Europe when it acquired UK's Corus for over $12 billion in 2007, in what remains to date the biggest overseas acquisition by an Indian company. However, as the global economy went into a tailspin with the financial crisis it had become an albatross around the neck of the Indian steel firm.
Tata Steel has invested £1.2 billion in its UK operations and trained 1,200 UK apprentices and graduates since acquiring Corus.
The company has been selling off its non-core assets across the world to improve its balance sheet and bring down its huge debt. Recently, it said that it is selling off its New Zealand-based subsidiary Tata Steel International (Australasia) Ltd to a local player named Steel & Tube Holdings for NZ$27.5 million (Rs 144 crore or $24 million) in cash.
The firm's scrip closed at Rs 456.15 per share, down 0.36 per cent on the BSE in a weak Mumbai market on Tuesday. Markets in India were shut due to state elections on Wednesday.
Founded in 1990, Geneva-headquartered The Klesch Group is a global industrial commodities business, with three divisions specialising in the production and trading of chemicals, metals and oil. The firm has revenues in excess of €5 billion, and employ more than 2,000 people across 30 locations in over 17 countries around the world.
"The Klesch Group has deep experience in the long products sector, and I look forward to sharing this experience with their team. We believe there is a growing market for the first class products made by this business and we intend to capitalise on this demand," said Gary Klesch, founder and chairman of The Klesch Group.
Commenting on the Tata's decision to sell European business, Sourindra Banerjee, Warwick Business School assistant professor of marketing, said, “The decision by Tata Steel to sell its Long Products Division has nothing to do with the financial health of Tata Steel as a company. Tata Steel is actually in good financial health with estimates that point towards better financial performance in the next couple of years. It is in line with its strategy to move up the value chain by providing differentiated, innovative and premium steel solutions for its customers."
“Such a strategy has its upsides and downsides. The upside is higher profitability and greater sustainability in a highly cost competitive business. The downside is business units which are unable to produce differentiated, innovative and premium steel solutions for its customers need to be trimmed," he said.
(Edited by Joby Puthuparampil Johnson)