Tata Said to Avoid Deeper Writedowns With Thyssenkrupp Deal

Updated on
  • Ousted chief had warned of over $10 billion in impairments
  • Mistry kicked out of India’s largest conglomerate last month

Tata Group’s European steel unit may be saved from deeper writedowns if it pursues a tie-up with Thyssenkrupp AG proposed by Cyrus Mistry, the ousted chairman of India’s biggest conglomerate, a person with knowledge of the matter said.

Tata Steel Ltd.’s planned European joint venture with Thyssenkrupp could reduce the need for impairments, according to the person, who asked not to be identified because the information is private. Mistry recently warned Tata’s European steel business faced potential writedowns of more than $10 billion, only some of which have been booked, according to an Oct. 25 e-mail the ousted chief sent to the board of holding company Tata Sons Ltd.

Mistry told Tata Sons directors multiple times of problems in group companies including Tata Steel, Tata Teleservices Ltd. and Tata Motors Ltd., the owner of Jaguar and Land Rover, according to the person. The Tata Sons board began getting impatient last year that the conglomerate was not exiting the steel operations fast enough, according to the person.

The deliberations at the tea-to-software giant help shed light on the power struggle behind India’s most dramatic boardroom coup in years. Tata Group replaced Mistry, 48, last month with his 78-year-old predecessor Ratan Tata after the board lost confidence in his leadership. Defending his record after the ouster, Mistry has said he inherited a debt-laden enterprise saddled with losses after a global acquisition spree.

“Whether this venture will happen is not clear -- there is so much uncertainty,” A. K. Prabhakar, head of research at IDBI Capital Market Services Ltd, said by phone from Mumbai. “The more you delay, the more impairments will be on the cards.”

Cutting Losses

A strategy document presented by Mistry in September gave details of ways to fix the problems in the companies and the key risks to the group, according to the person. In the presentation, Mistry also proposed merging some other group companies and suggested the conglomerate exit certain units that weren’t performing, the person said. 

The conglomerate also felt that the commodity supercycle was over and was keeping a close eye on developments in China, the person said. Mistry’s strategy document wasn’t found suitable, as it would have made the group’s shareholders heavily dependent on dividends from Tata Consultancy Services Ltd. and didn’t have adequate return on capital, according to people close to Tata Sons, who asked not to be identified because the matter is private.

Representatives for Tata Steel and Mistry’s office declined to comment. A spokesman for Thyssenkrupp said the company won’t comment on internal Tata dealings.

Biggest Acquisition

Tata Steel said in July it’s in talks with companies, including Thyssenkrupp, about a joint venture in Europe. Combining forces would enable Tata, Europe’s second-biggest steelmaker, and third-ranked Thyssenkrupp to better use their facilities and cut costs.

In 2007, Tata Steel made the largest overseas acquisition ever by an Indian company, paying about $12.9 billion for Corus Group Plc, which included the former British Steel. However, a demand slump in Europe after the 2008 economic crisis and a flood of cheaper Chinese imports hurt operations. Tata Steel has booked more than $2.3 billion of writedowns on its U.K. and continental European operations, according to data compiled by Bloomberg. 

Tata Steel last month reaffirmed plans to revamp its loss-making U.K. operations and said talks are progressing with Thyssenkrupp on the potential joint venture. The Indian company is looking to sell its South Yorkshire-based specialty steels business and is also “deeply engaged with all relevant stakeholders in the U.K. to find a structural solution” to legacy pension liabilities, it said in a statement dated Oct. 27.

— With assistance by Oliver Sachgau, and Swansy Afonso

(Updates with analyst comment in fifth paragraph.)
    Before it's here, it's on the Bloomberg Terminal. LEARN MORE