Tata Group in negotiations with U.K. over possible state bailout

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Despite talks of negotiations over a potential Tata Group bailout in the U.K., the Indian firm has proved itself a generally good steward of the businesses it has purchased in the U.K. over the years.

In hindsight, its purchase of Jaguar Land Rover from Ford for U.S. $2.3 billion in June 2008 was a steal. However, it was half what Ford had paid for the brands at the time, as JLR had an aging product range and a stodgy image.

Tata invested billions in product design and new model development. As a result, sales and profitability soared.

Tata’s purchase of Tetley Tea was also seen as buying into a mature market with limited growth prospects back in 2000. However, since then, the brand has grown into the second-largest tea brand in the world.

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Tata’s steel operations

Tata’s largest European acquisition, however, has not been so successful.

Corus Steel comprised an earlier merger of British Steel and Corus of the Netherlands.  Principally, the merger included the giant steelworks at Ijmuiden and British Steel’s Port Talbot Steel complex (the largest steel mill in the U.K.).

Combined with some smaller steel operations, this makes Tata Steel the third-largest steelmaker in Europe. Tata manages a workforce of 20,000 in Europe.

Despite considerable investment over the years, British Steel operations has failed to break even at the operating level for a decade. According to a report by the Financial Times, the steelmaker is bleeding cash.

The latest set of accounts, pre-COVID, showed a pre-tax loss of £857 million before one-off items in the 12 months ending March 31. For the same period the previous year, the company ran a deficit of £146 million.

Worse, for the first time the accounts felt the need to caution “material uncertainty” on its future funding and cast significant doubt on its ability to continue as a going concern.

In part, Tata Steel blamed its worsening performance on reduced steel margin, the difference between raw material costs and selling prices. Revenues dropped 12% to £6.2 billion, the Financial Times reported.

Tata is negotiations with government on possible bailout

Tata Group has continued to take measures to prop up the business.

The group has strengthened its balance sheet by canceling £5.3 billion in debt. In addition, it has waived £1.9 billion in obligations and converted a further £3.6 billion into equity.

Tata is in negotiations with the British government about a possible bailout. The firm has warned it cannot continue to fund losses indefinitely.

However, it is hard to see how the firm can achieve a sustainable turnaround.

Sales have struggled, falling 20% due to the ongoing pandemic. Furthermore, there is continent-wide weakness across various industry segments, including automotive and construction.

The U.K. government could probably find a way around European state-aid rules by invoking an emergency argument, as some other European countries have done. The case will probably come down more to a trade-off between the pain caused by mass layoffs at a time when the ending of the furlough scheme will see a sharp rise in unemployment through the end of this year.

Normally, a British Conservative government would be firmly against state bailouts. This government, however, has shown its self to be more socialistic in many of its policies than even some Labour governments.

As such, don’t count out the possibility that the government may cut some kind of deal with Tata.

However, whether the U.K. taxpayer will ever see a return is, on the basis of the steel group’s performance so far, seemingly unlikely.

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