Stexit.

     First, there was the RRexit. And while the markets eventually got down to digesting it, a mere few days later, in what was nothing short of a shocker, there was the Brexit. It was a referendum that jolted Europe and the world, sent the Pound Sterling to a three – decade low and triggered omens of a new recession setting in. And that wasn’t all. The 52 – 48 Brexit result triggered Cameron's Davexit as well. 

     But as far as exoduses go, they certainly weren’t the first. For, long before the RRexit, Brexit and Davexit crippled the markets, Stexit had been put in play. It was a story that began in 2007 at the peak of the market and could end soon, at its trough. It was a tale that began with a GBP 6.7 billion price tag and will likely end with that of a single coin featuring the visage of Queen Elizabeth II. As far as one Indian company’s British sojourn goes, it might just be all she wrote.

     In 2007, as the world was scaling a new high and nothing could seemingly go wrong, several Indian companies finally mustered the courage to pursue acquisitions overseas. Over the past three decades or so, it has been the norm for foreign companies to acquire their Indian counterparts at the bottom of the market, while Indian companies usually went scouting for overseas buyouts at the very top of the market. Well, the year 2007 stuck to the norm and didn’t turn out to be the exception. United Spirits had taken a large swig called Whyte & Mackay, Hindalco had acquired Novelis and Suzlon had engulfed both Hansen and REpower.

     Tata Steel was one such company that came to the party just in time to do the dishes. With the Indian market not offering enough to whet its appetite for growth and scale, it decided to establish a global footprint of its own. Capital, after all, was sloshing around in abundance. Moreover, some of its earlier overseas ventures such as its acquisitions in Singapore (NatSteel) and Thailand (Millennium Steel) were successful. What could go wrong, this time around?

     For over two years, Tata Steel had been in talks with the British giant, Corus Steel and the time seemed right to forge an alliance. While the Tatas were closing in on Corus in 2006, the Brazilian giant, CSN entered the fray and locked horns with the Tatas. After a protracted bidding war with CSN, which saw Tata Steel triumphing with a bid of 608p per share, the world finally sat up and took notice of Tata Steel. 

     A minnow from India had just swallowed a British giant no less than three times its size to create a behemoth that was now the world’s fifth largest steel producer, one which straddled a number of markets. The markets though didn’t seem to like what they saw, with Tata Steel’s scrip tanking as though it had bought a pig in a poke for an outrageous sum. And as time would later tell, it had. While the deal was indeed a landmark transaction in the steel industry, it came at the worst possible time. Asset prices had zoomed, the commodity cycle had peaked and a crash was on the horizon.

     In 2008, when the financial crisis hit, industrials was one of the first and worst hit spaces, with demand for steel crashing, even as industrial production and construction virtually grounded to a halt globally. While Corus may have been a vaunted asset a year ago, its speciality steel focus and high cost structure soon turned out to be a millstone around the company’s neck. Tata Steel’s low cost of production was at odds with Corus’ high-cost structure and speciality products focus. In a bid to stem its losses, Corus’ Teesside plant was shuttered and a year later, it was sold to Thailand’s SSI. The quick recovery that the bourses saw didn’t play out as well in the steel industry. Over the next two years, production of and demand for steel nearly creaked to a halt as steel giants around the world bled and prized assets were put on the block.

     The Eurozone crisis that exacerbated in 2011 certainly didn’t do the company any favours and with losses mounting, jobs were axed. Tata Steel took write-downs to the tune of over three billion dollars and restructured debt worth over a billion dollars. In 2012, one of the largest industrial markets, China, began to descend into a major slowdown and commodity prices began a downward spiral. Steel was one of the worst hit, with metal prices crashing. If that wasn’t enough, steel from China and to some extent, Taiwan and Korea began flooding the global markets, only increasing the downward pressure on prices, as both manufacturing and construction demand tapered off. 

     Between 2000 and 2012, global steel output had more than doubled, with over half of that new steel bearing the Dragon's stamp on it. And while China had to keep its colossal mills rolling out steel to prevent their closure, even as its economy hit new lows, global steel prices nosedived even further. China began infiltrating Britain with its low-cost steel but the government did little to counter the threat and protect its iconic steel industry. In fact, even as nations around the world, including the USA and India scrambled to impose anti-dumping duties on Chinese steel imports, the British Government dawdled and even opposed the EU's plans to raise duties, citing trade concerns. As far as the local steel industry was concerned, Britain's erstwhile golden goose had already turned into an ugly duckling and it was in danger of being butchered by the Chinese.

     Needless to say, anything that affected the local steel industry had a direct bearing on Tata Steel. While Tata Steel’s domestic business was essentially a low-cost operation as all of its inputs originate in India itself, Corus was where the company took a beating. Its high cost of production was largely due to inputs being shipped in from Australia, South America, Africa and Asia and in a gloomy business environment, there weren't many takers for its high-grade steel and speciality steel products.

     Over the course of the next 3 years, Tata Steel continued to post quarter after quarter of losses and its scrip virtually went nowhere but downward. Impairment after impairment followed, even as the book value of its UK business came closer and closer to zero. The write-downs continued even as the economic environment exacerbated. While the sale of its Long Products division to the Klesch Group could have been a shot in the arm, Klesch walked away from the table at the very last minute, leaving Tata Steel with its problem child. Closure, however, was finally on its way. It didn't come naturally though. This turned out to be a steel story that had to be forged to its finish.

     In March 2016, in an announcement that made headlines and brought David Cameron rushing back to London from a vacation that he cut short, Tata Steel announced that it was exiting its UK operations. It had invested over 3 billion Pounds in new blast furnaces and in the upgradation of its plants, while never having made any money. Moreover, with metal prices hitting new lows and demand still muted, Tata Steel Europe was losing over a million Pounds each day. The British business was on the block, including the flagship plant at Port Talbot in Wales. Moreover, Tata Steel Europe’s pension liabilities were turning out to be another major headache, with Tata Steel having to plug any deficit via a contribution. 

     The sale announcement interested several buyers including ThyssenKrupp, Liberty House, Greybull Capital, Wilbur Ross and JSW Steel. The British Government, in a bid to save jobs, announced aid worth several hundred million pounds to the buyer in order to get the steel plants back in action. David Cameron even went as far as announcing that the British Government was ready to take a 25% stake in the business, pump in aid and cover the pension liabilities, all in a bid to keep Britain’s steel industry alive. In the midst of all the action, Greybull Capital stepped in and acquired the Long Products division at Scunthorpe for the royal sum of 1 pound, with the British Government extending a 400 million Pound financing package for a completely impaired asset. With the remaining portion of Tata Steel’s business still in the dumps and with steel production unviable at Port Talbot, it seemed as though what was left of Tata Steel’s UK business would soon suffer the same fate as Scunthorpe and end up being sold for a nominal sum. After all, at a time when even ArcelorMittal was hiving off steel plants and mines to tide over a liquidity crisis, Tata Steel couldn’t really be expected to do much better.

     And then, on 23 June 2016, the Brexit referendum shook the UK to its very core and shocked the collective world at large, even as a 52-48 outcome announced a departure from the European Union. While the Davexit soon followed, some still say that the decline of the UK's iconic steel industry and Tata Steel's decision did play its part in Davexit as well. The Brexit, however, may have just complicated the sale of Tata Steel’s British assets, as have the heightened uncertainty, the expectations of a major slowdown in the British economy and a volatile currency. Earlier, while a buyer would have looked at Europe as a single market, the eventual exit of the UK from the Eurozone would ultimately result in individual trade pacts with the rest of the Eurozone countries, further complicating business. Europe, after all, constitutes over half of Tata Steel’s sales in terms of revenues. 

     However, in a recent board meeting, the Tatas announced that they were doing a 180 and putting the sale on hold, while reassessing their decision to exit Europe. A select sale of some units as well as a joint venture with German major ThyssenKrupp might be some ways forward for the company. The joint venture would, in all likelihood, include the Port Talbot plant, along with a profitable facility in the Netherlands. In an interview a few months ago, Kaushik Chatterjee, the finance director of Tata Steel, stated the markets were more or less at their base and that a pickup was soon to be expected. In such a scenario, retaining the business and holding out for some time at least might make sense. On the other hand, if the Tatas were to exit, it would be the perfect case of investment logic being turned on its head, with an asset being bought at the summit of the market and sold at its nadir.

     In the larger scheme of things, the entire Stexit saga does call into question the aura that seemingly surrounds the Tata Group, at a time when most of its businesses are struggling. While TCS continues to be the unrivalled jewel in the crown and Titan and Tata Elxsi continue to grow at a robust pace, the rest of the Tata companies are laggards at best. Tata Sponge Iron and Tata Metalliks continue to face a weak metals market, mirroring Tata Steel. As far as Tata Motors goes, its growth may be strangled by the Brexit, especially if future trade pacts and duties work against the UK. While the Pound’s depreciation may be a blessing, import duties and a slower economy might run JLR off the road. Moreover, Tata Motors’ domestic business continues to be an albatross around its neck, with the commercial vehicle sales not witnessing an uptick and the passenger cars business continuing to struggle. 

     Tata Teleservices continues to bleed and with NTT choosing to exit, the Tatas might have to cough up over a billion dollars, in a case that’s still pending in litigation. Indian Hotels, though still bleeding, is limping back to profitability after having sold some of its marquee properties, a la Taj Boston and its stake in Orient Express Hotels. Tata Sky continues to lose money albeit an ameliorated performance at the operating profit level, even as it gears up for an IPO somewhere down the line. Boarding the e-commerce bandwagon, Tata’s new online venture, CLiQ is going to need large investments to grow and achieve an eventual and doubtful breakeven, going forward. Last but certainly not least, both AirAsia India and Vistara continue to burn cash and lose money, even in this low oil price regime. AirAsia India is only just flying out of a management churn while Vistara’s entry strategy of premium pricing backfired, even as it needed two large rounds of capital infusion from its promoters in less than eighteen months. And now, with 5/20 being replaced by 0/20, both airlines have announced plans to ramp up their fleets and take to the international skies, both of which are only going to heighten cash burn and increase losses, especially if oil prices surge again. And can Tata Steel be far behind? Of course not. While Indian steel demand barely clocked a 4% growth in the last fiscal and with global steel demand having tumbled by 3%, Tata Steel has already announced plans to expand capacity at its plants and increase automation, the most ambitious being a 60% increase at Kalinganagar. And of course, there is that not so ho-hum matter about the acquisition of a certain overseas business for a few billion, pumping in a few billion, losing a few billion, writing off a few billion and at the end of the day, selling the whole shebang for a single, solitary Pound.

     For now, the fate of Tata Steel’s UK business seems uncertain, with both a continuation via a ThyssenKrupp JV and the original proposed sellout still on the cards. Tata Steel, over the past eight years of the Corus sage has been worse for wear, with its output, sales, operating profit, net profit all falling, while its debt has reached a level of over Rs. 80000 crores. If the UK business is indeed hived off, Tata Steel’s Indian business would be a much cleaner and sought after asset on the bourses, especially given that it has turned profitable on a standalone basis in the recent past. Tata Steel recently announced plans to raise Rs. 10000 crores to strengthen its balance sheet and invest in new growth opportunities. That, however, might just have been a subtle way of saying that the company plans to retain Corus and fund it further, until the storm finally passes over.

     With the commodities market seemingly having bottomed out and on the way to a slow recovery, retaining the UK business might seem to be a logical albeit painful way forward for Tata Steel. And if Tata Steel does bite the bullet and if the Stexit does indeed happen, then this would be one steel story that would have well and truly gone to rust.