Posted on 12 Jul 2016
India's Tata Steel will mothball plans to sell off its U.K. business and instead explore integrating its European operations with those of No. 1 German steelmaker Thyssenkrupp.
The Indian steel giant announced Friday that it had decided to pursue alternatives that allow its European operations to keep running. The most prominent of those alternatives is a merger with Thyssenkrupp, according to the announcement released after a 10-hour board meeting.
Changed circumstances
Tata Steel said in March that it was considering selling off its entire U.K. business following earnings deterioration. Seven parties expressed interest in purchasing the business, but most are believed to have dropped out after the U.K. national referendum last month backed the country's exit from the European Union. The U.K. leaving the EU means trade tariffs likely will be introduced for steel exports to the economic bloc, in addition to the widely expected negative impact on the British economy.
Heightened uncertainty in the wake of the Brexit vote prompted Tata Steel to seek this deal with Thyssenkrupp. Prior to the referendum, the two had only been exploring the potential of a merger involving just the Indian firm's steel plant in the Netherlands, whose earnings are relatively stable.
Political influence
While announcing the expanded negotiations that cover an integration of its entire European operations with Thyssenkrupp on Friday, Tata Steel warned that it is still too early to guarantee a successful outcome. Political pressure from the U.K. government could become the biggest hurdle in the talks.
Tata Steel's Port Talbot steelworks is one of the largest steel production facilities in the U.K. Because its survival is regarded as key to the future of the country's steel industry, the government announced its readiness to offer various assistance measures, such as a reduction in the company's pension obligations, to ensure the plant continues to operate.
But the facility is badly dilapidated, and a massive investment would be needed to enable it to produce high-value-added products. The U.K. government may be able to provide financial assistance, but the plant will need more than that to become more competitive.
If the negotiations touch on restructuring Tata Steel's U.K. operations, the government will likely apply political pressure to protect jobs. With a new leadership team expected to take over in London shortly, political developments in the U.K. are certain to influence the outcome of the talks.
