Tata Steel sells 70% stake in Singapore, Thai arms to Chinese Group for $480 m

The Chinese steel major will USD 327 million in cash to the Tatas and take over USD 150 million combined debt of these companies.

Tata Steel sells 70% stake in Singapore, Thai arms to Chinese Group for $480 m

Mumbai: As part of its strategic plan to exit non-core markets and focus more on the fast-growing home market, Tata Steel Monday signed an agreement to sell 70 percent stakes each in its two Southeast Asian arms to the HBIS Group of China for around UD 480 million.

The company runs NatSteel Holdings in Singapore and Tata Steel Thailand, through a Singapore-based fully-owned subsidiary TS Global Holdings, which signed a definitive agreement with an HBIS Group-controlled entity-the second largest alloy maker in China--to divest its majority stakes in these two arms--a move closer to mark the Tatas' long-awaited exit from these two markets.

The Chinese steel major will USD 327 million in cash to the Tatas and take over USD 150 million combined debt of these companies. Still the deal is 1.5 times the book value of these companies.

This is the second major deleveraging that Tata Steel has done in as many years having merged its heavily loss- making European operations with ThyssenKrupp last year by creating a new giant joint venture with the German engineering and alloy major.

The agreement was signed in Beijing, the company said, adding post-deal, the Tatas will continue to hold 30 percent each in these two companies through TS Global Holdings.

"As per the agreement, the divestment will be made to a company in which 70 percent equity will be held by an entity controlled by HBIS and 30 percent will be held by TS Global Holdings," the company said.

While the enterprise value of the deal is estimated at around USD 685 million, Tata Steel is expected to get only around USD 327 million along with deleveraging of debt of around USD 150 million on both the entities.

"We've been working on this since the past few months and finally we have been able to sign a definitive agreement for selling our stakes in these firms. So, in the new JV our stake will be 30 percent while the rest will be held by the HBIS Group," managing director & chief executive TV Narendran told reporters in a conference call from Beijing.

"The rationale behind this divestment is optimum return on capital. This partnership is strategic as HBIS, the second largest steel producer in China, gets an entry in the Southeast Asian markets and we as a partner can take the benefit of the upside and also bring in capital," he said.

Narendran further said since China is already a mature market apart and the world's largest alloy maker with nearly 1,000 mt in annual capacity, the next growth opportunity for HBIS is the Southeast Asian market that is currently 80-90 million tonne and growing at 7-8 percent.

"We have the option to spend capital either in our home market where we have a good presence and are profitable or in overseas. Since the home-market opportunity is massive we decided to focus on this and with divestment we are creating a structurally strong enterprise," he added.

Narendran further said the partnership with the Chinese will offer the Tatas robust growth opportunities in Southeast Asia, given the access to resources, technical expertise and regional understanding of the HBIS.

Whether they will look at exiting these markets later, Narendran said, "currently we have decided to remain as a partner and stay invested in the JV for three years. After that we may decide on how we would monetise it either by IPO or through other means, either in parts or whole."

Chief financial officer Koushik Chatterjee said almost the entire proceeds from sale will be used to pare debt.

"This will be used largely for our deleveraging at the group level. We'll be getting USD 327 million in cash from the deal. That apart, debt to the extent of USD 150 million of these entities will be taken over by the Chinese company. This will get deleveraged from the group balancesheet. In all, the deleverage will be to the extent of USD 450 million."

Whether Tata Steel will have representation in the new entity, Narendran said the deputy chief executive and deputy chief financial officer will be appointed by Tata Steel with board representation. But the name of the new JV will be decided by HBIS, he added.

Tata Steel has an annual crude steel capacity of 27.5 mt with a very diverse geographical presence.

The Hebei province-based HBIS Group was established in June 2008 by merging Tangshan Iron & Steel Group and Handan Iron and Steel Group and is the second largest steel maker in China, serving home appliances, automobile, nuclear power, marine engineering, bridges and construction sectors.

The Tata Steel counter closed with a loss of 1.55 percent at Rs 445.65 on the BSE reflecting the heavy selling in the market that pulled down the benchmark by over 1 percent.