Brexit Vote Pours Cold Water On Tata Steel’s Sale Plans

28 June 2016

The U.K.’s decision to leave the European Union could cast doubts over Tata Steel Ltd. ’s efforts to sell its businesses in Britain, analysts said.

The Mumbai-based company, whose British unit is one of Europe’s largest steelmakers by production capacity, said in April that it wanted to sell its U.K. operations, citing severe funding problems and blaming a global glut of steel and high manufacturing costs.

Tata Steel U.K. employs roughly 11,000 people at nine plants across the country, of which about 4,000 are based at Britain’s largest steel plant in Port Talbot, Wales.

The company has cut thousands of jobs over the past few years amid lackluster demand and an influx of cheap steel imports from China.

The U.K.’s vote on Thursday to leave the EU raises uncertainty over how the country will extricate itself from trade relationships, immigration rules, and other policy areas with the bloc, complicating Tata Steel’s sale process, analysts said.

“Trade negotiations with potential buyers will not be easy as business activity in the region will take a hit,” said Goutam Chakraborty, an analyst at Mumbai-based Emkay Global Financial Services.

Potential investors are expected “to wait and watch to get some clarity” on any economic changes, Mr. Chakraborty said. “It is not a one-day event. It will pan out years of uncertainty for businesses,” he added.

A quarter of Tata’s U.K. steel is sold in continental Europe. Another 15% is sold to other parts of the world. The remaining 60% is bought by customers in the U.K.

The company last month shortlisted seven potential bidders for its U.K. business. Although Tata Steel didn’t name them, people familiar with the matter said they include Liberty House, the commodities trading firm founded by Indian businessman Sanjeev Gupta, Excalibur Steel Ltd., the management-buyout vehicle set up by some of Tata Steel U.K.’s  senior executives, and U.K. investment firm Greybull Capital LLP.

The U.K. government previously said it would be willing to assist in finding a buyer by helping to resolve the company’s growing pension liability, offering loans on commercial terms or even buying a minority stake in the company’s U.K. business.

Tata Steel is pushing ahead with its sale process and hasn’t received notice from any bidders of their intention to withdraw from the sale process due to the vote outcome, a person familiar with the matter said Monday.

“The strategic review of our business continues,” said a Tata Steel spokesman.

“Like business across the U.K., parties involved will be considering implications from the referendum. We remain committed to working toward the best possible outcome for the U.K. business,” the spokesman added.

A Liberty House spokeswoman said Monday that management at the firm “remain optimistic about the future and they see no reason why ‘Brexit’ should impact negatively on their plans” to bid for Tata Steel’s remaining U.K. assets. Liberty House bought Tata Steel’s two Scottish steel mills earlier this year.

An Excalibur spokesman said “Brexit hasn’t changed our plans and ambitions in relation to the acquisition.” A Greybull Capital spokesman declined to comment on the firm’s interest in Tata Steel’s U.K. assets.

Greybull Capital announced June 1 that it had completed the purchase of Tata Steel’s European long-products business, which is largely located in the U.K.

Tata Steel’s largest labor union, Community, said it was still optimistic about a sale. “We are still hopeful that a deal can be done,” a union spokesman said. But he said a Brexit could make it harder to close a deal. “It’s clearly not the environment we wanted.”

In a separate statement, Roy Rickhuss, general secretary of Community and chairman of the National Trade Union Steel Coordinating Committee, said that “the EU referendum result and the government turmoil that has resulted have placed new question marks over Tata Steel’s sales process and the trade unions need to understand what actions government will take to safeguard the future of UK steelmaking.”

With Britain’s departure from the EU, “exports from the country are likely to get impacted” as trade barriers will come in place, said Sudarshan Shreenivas, an analyst at India Ratings.

Mr. Shreenivas said the Brexit could be “an additional stumbling block” in an already-tough business climate.

Potential bidders have so far viewed the European market as a whole. “They will now study how trade ties will shape up between Britain with other European nations,” he said.

An analyst with an Indian brokerage, who asked not to be named, said there could be “re-discussions on the proposed deal,” which could delay the sale process.

The British pound on Monday hit a fresh three-decade low due to uncertainty over the U.K.’s economic prospects. By the same token this could potentially be a boon for U.K. exports by making it cheaper for foreign buyers to purchase British products.


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