The complete exit from UK can translate into positive EBITDA profits in the overseas operations and improve long-term cash flow visibility. While leverage levels are unlikely to see any direct reduction from the sale of the Long Products Europe business, its EBITDA losses from the region will be curtailed, which will facilitate gradual deleveraging of the company. During the nine months ended 31 December 2015, Tata Steel's European operations reported EBITDA loss of INR3.39bn, largely on account of its loss making UK operations.
The UK assets have a combined steelmaking capacity of around 10.2m tonnes distributed across the Port Talbot (Blast Furnace, Flat Products), Scunthorpe (Blast Furnace, Long Products) and Rotherham (EAF) plants. The “Sale and Purchase” agreement that Tata Steel has now signed covers primarily around 4.5m tonnes long steel products facility at Scunthorpe and other associated long products facilities in the UK. Within Tata Steel's portfolio of European assets, these facilities were the least profitable, and hence the divestment of these is a positive.
The European region, which includes UK and Netherlands, accounts for 52% of Tata Steel's total revenues in FY15. After the sale of UK assets, TSE will consist primarily of the highly efficient and moderately profitable facility in the Netherlands, leading to a sharp improvement in TSE's margin and profitability, providing a improvement in credit profile in the long-term.
The deal with Greybull Capital will be completed once the outstanding conditions have been resolved, including transfer of contracts, certain government approvals and satisfactory completion of financing arrangements. The concern remains as far as the main UK pension fund deficit is concerned, which expanded to GBP485m as of 31 March 2015.
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