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MOSL: TATA STEEL (Neutral)-Back to square one in Europe- EU steel spreads under pressure

Tata Steel: Back to square one in Europe; EU steel spreads under pressure; Maintain Neutral

(TATA IN, Mkt Cap USD7.9b, CMP INR487, TP INR532, 9% Upside, Neutral)

 European Commission to reject Tata-Thyssen JV proposal

The European Commission (EC) is likely to reject the proposed JV between the European steel operations of Tata Steel and ThyssenKrupp, according to both the companies. Managements have stated that the remedies offered by the companies are unlikely to clear the market test, based on feedback received from the Commission. The additional remedies sought by the Commission would defy the economic logic behind the proposed merger (probably involving sale of some core operations). A formal order rejecting the merger will be issued in due course. TATA’s stated objective for the merger was to deleverage its balance sheet and create a sustainable European steel business. The proposed JV would have created ~21mtpa steel enterprise, the second largest in Europe. Tata would have transferred debt of ~EUR2.5b and Thyssen pension and other liabilities of ~EUR4b to the JV. The companies expected ~EUR400-500m in synergy gains.  

 

Possibility of cutting exposure to European operations now bleak

As we had mentioned earlier, the reduction in debt post the JV was more of an accounting classification change rather than any change in economic interest in Europe for TATA. Debt of JV companies was consolidated on a proportionate basis prior to the new Ind-AS accounting standard. TATA still would have had ~50% economic interest in the entity with liabilities of more than EUR6b. The synergy gains would have driven value creation, but they were in any case expected to be realized over the medium-to-long term, with a risk of synergy gains getting diluted by inflation and market competition. In the long term, TATA could have lowered its stake in the JV (through a strategic sale), reducing its exposure to the European (TSE), which now appears unlikely.