For a decade, Tata Steel’s entry into the European market has remained the industry’s best example of an acquisition gone awry.
The Mumbai-based company had bought over Anglo-Dutch steelmaker Corus for $12 billion in 2007—a year before the global economic crisis —to become the world’s fifth largest steel company. It was also the largest-ever overseas buy for an Indian firm. More than half the cost was funded through debt.
Now, almost a decade later, Tata Steel has decided it can’t survive in the UK any longer. Tata Steel had been operating in the region ever since the acquisition.
In an early morning statement today (March 30), Tata Steel said it “has advised the board of its European holding company, Tata Steel Europe, to explore all options for portfolio restructuring, including the potential divestment of Tata Steel UK, in whole or in parts.”
The last 12 months have been particularly bad for Tata Steel’s UK subsidiary as its financials deteriorated. The statement further added:
While the global steel demand, especially in developed markets like Europe, has remained muted following the financial crisis of 2008, trading conditions in the UK and Europe have rapidly deteriorated more recently, due to structural factors, including global oversupply of steel, significant increase in third country exports into Europe, high manufacturing costs, continued weakness in domestic market demand in steel and a volatile currency.
A failed acquisition
Tata’s acquisition of Corus in 2007 made Tata Steel the first Fortune 500 multinational from India.
The acquisition also coincided with the preparations for the 2012 London Olympics, which fuelled huge demand for steel. While the acquisition made Tata the world’s fifth largest steel company in 2007, nine years later, it had dropped six positions.
With the Corus acquisition, Tata Steel’s annual capacity grew to 25 million tonnes from 8.7 million tonnes. The deal also gave it access to the European markets.
Tata, though, had to pay a 34% premium on the original bid after Brazil’s CSN also joined the race. And this drain came just a year before the economic crisis threw the world economy into doldrums.
“If one had known there was going to be a meltdown, then yes, but nobody knew,” Ratan Tata, the group’s former chairman, had said about the timing of the acquisition.
Since the Corus acquisition, the UK business has proved to be particularly painful for Tata Steel. Moreover, Tata Steel Europe hasn’t been able to turn profitable despite numerous job cuts, asset sales and modernisation.
For the quarter ending Dec. 31, 2015, its European business reported a loss of GBP 68 million, more than double the loss made in the previous quarter. Cheap imports from China were the main culprit. Additionally, the company has been cutting jobs in the UK to contain costs. It axed 1,050 in January, and since October, the total layoffs have soared to 3,000.
The UK’s steel industry has seen a huge slowdown in recent years. Steel producers contributed to about 0.5% of the GDP in 1990s, which is now down to 0.1%. Additionally, while the UK’s GDP rose 62% between 1990 and 2014, the steel industry shrank by 24%.
However, some of Tata’s other high profile acquisitions have worked.
In 2000, Tata Tea bought the UK-based Tetley, a big acquisition that put the Tata group on the global map. Eight years later, Tata Motors acquired Jaguar Land Rover (JLR) from Ford, in 2008. JLR has since then been the saving grace for Tata Motors, which has failed to revive domestic passenger car sales.