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Tata Steel’s European adventure: Act II

LiveMint logoLiveMint 13-09-2017 Ravi Ananthanarayanan

At the very least, the separation of the British Steel Pension Scheme (BSPS) from Tata Steel UK Ltd should lighten the burden of funding its legacy pension liabilities. The best scenario for Tata Steel Ltd is if its European business (of which Tata Steel UK is a part) combines with ThyssenKrupp AG’s steel business. The separation removes a key obstacle to the transaction.

That is why Tata Steel’s shares were up by 3.3% on Tuesday, when it disclosed that the UK pension regulator has approved the separation of BSPS from Tata Steel UK and a number of associated firms.

What happens now? Tata Steel has paid £530million or Rs4,640 crore to BSPS and also a 33% stake in Tata Steel UK to BSPS. Now, its members have to decide by December 2017 if they want to remain with BSPS or shift to a new scheme to be launched by Tata Steel UK. Depending on the split, the pension assets will be divided. This should be known by the end of the current fiscal year. Under the new scheme, the annual increase in pensions is lower, making it easier to manage.

The payment made to BSPS will reflect in the September quarter results, as an exceptional item. The allocation of a 33% stake also means a minority interest is created to that extent, and should lead to a sharing of losses and profits of Tata Steel UK. This will accordingly affect the consolidated profit of Tata Steel as well. Clarity on both aspects should be visible in the September quarter results.

A more manageable UK pension obligation by itself is good news for Tata Steel. Whether the ThyssenKrupp transaction itself proceeds is another issue. Certainly, the pension liability was one question that has been settled. But there are others. The business environment has changed considerably since the time Tata Steel began to explore strategic options for the European business. Steel prices have picked up and, helped along by its restructuring, profitability has improved in the UK and Europe. Both parties can therefore bargain from a position of strength. ThyssenKrupp’s management commentary suggests it is in favour of a combination.

An activist investor Cevian Capital, with a 15% stake in ThyssenKrupp and with a seat on its supervisory board, is opposed to the combination, according to an 11 September Bloomberg report. It and some other members favour a spin-off of the company’s non-steel assets. Either way, a decision is likely by the last week of September, according to the report, and when that happens, the way forward for Tata Steel’s European business will become visible.

If they indeed decide to combine, then the structure and the potential benefits for Tata Steel will need to be evaluated. If ThyssenKrupp’s board decides against the combination, investors could see it as a negative for Tata Steel, as its valuations seem to factor in the likelihood of a combination.

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