British Steel Rises, But Tata Steel Might Get the Best Deal to Stay

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Tata Steel has completed the sale of its long products business to Greybull Capital, in a deal that will preserve 4,400 UK jobs and revive the British Steel name, the Guardian reports this week. Well, that’s part of Tata U.K. that will survive, at least for a while.

Two-Month Trial: Metal Buying Outlook

Greybull repeatedly states that it’s a financial firm that makes long-term investments in private companies and has variously been described as a turnaround specialist and a private equity house. In reality, Greybull has a checkered history.

The higher risks of buying distressed companies, notwithstanding, some of Greybull’s ventures have been successful: Monarch Airlines purchased in 2014 was back in profit by 2015, but others like Comet and Riley’s Sport Bars, have been less of a success. The acquisitions ending up going out of business or so drastically carved up that what’s left is a shadow of their former selves. Either way, few of Greybull’s purchases have been long term. Monarch was back up for sale within two years.

The Pension Problem

The formula is a tried and trusted mix of trying to shed pension fund liabilities, either by buying the firm with the condition that the pensions are reduced, or by negotiating with the former owners to shed off the pension fund liabilities. Greybull also negotiates lower wage rates and changes to hours and working practices within the workforce, and places a buffer between Greybull and the acquisition so that if it does go down, it’s not Greybull that is left holding the debts.

Greybull is certainly far from alone in this regard, all investors in distressed firms or “turnaround specialists” use a similar bag of tricks to maximize their chances. But we shouldn’t be fooled into thinking of the firm as white knights. The company is in this for the money and if it suits its purposes will asset strip and sell off parts to maximize a return.

The use of British Steel as a name for the Scunthorpe and associated works purchased this Spring from Tata Steel is a clever one, the media particularly has rallied to the cause quoting this as the renaissance of the British steel industry.

The move looks like it should safeguard the majority of the 4,800 work force and plans released so far suggest all the sites will be kept operational. The purchase price of £1 may sound like a steal but although the group of plants had sales estimated last year at £1.6 billion ($2.3 billion) it actually made a loss of £100 million.

Still, closure of the flat-rolled facilities and a coking oven along with reductions in salary rates and pensions, have helped contribute to an early turnaround and Greybull say the operation is now profitable or will be during the course of this year.

Port Talbot Still on the Block

Greybull is now the frontrunner to take on the remainder of Tata’s U.K. steel operations including the huge Port Talbot, South Wales plant, 10 other manufacturing operations around the U.K., and some 11,000 employees.

That is, if Tata doesn’t decide to hold onto it themselves. Why, after all this, would they, you may ask? Two developments spring to mind. First, the U.K. government has offered to, in desperation to keep the U.K. steel industry alive, take a 25% stake in the enterprise.

Such state handouts don’t come along very often and may yet prove illegal under E.U. state aid law. The other is government ministers are said to be consulting on proposed changes to the £14 billion British Steel Pension Scheme that would lower payouts and separate the pensions from the business.

With 130,000 members and an estimated deficit of £700 million, the scheme has been a major obstacle to a sale and, indeed, part of the burden preventing Tata from making a profit for much of their ownership.

Long Haul? Or Short-Term?

Tata is generally acknowledged to have a) bought Corus at the wrong time, b) paid too much and c) in spite of a) and b) been good custodians of the firm in the intervening 10 years. If the ground rules could be changed sufficiently for Tata to turn a profit, even in the current depressed global steel market, Tata and the U.K. government would seriously consider it.

Tata has shown it is a company in it for the long haul. That it is willing to invest not for a profit tomorrow but for profit way down the road. Arguably, if the economic mix at Port Talbot and the rest of Tata’s U.K. operations could be made more favorable, it would be in the Indian parent’s interests to hang in there and see some payback further down the road.

For the U.K. steel industry that would be the best outcome, regardless of the pleasure in seeing British Steel resurrected as a brand, we are good with Tata, so long as it preserves the industry in a form we would recognize as a going concern.

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