The enterprise value of Tata Steel Europe, erstwhile Corus, has dropped substantially from what Tata Steel paid to acquire Corus in 2006 as the company struggles to sell the metal in a weak European market and battles high cost of production from sourcing all its raw materials from outside suppliers.
?In 2006, Tata Steel acquired Corus (now Tata Steel Europe) at an enterprise value payment of $13.6 billion; this now gets an enterprise value of $2.36 billion (around R11,612 crore) given the uncertain economic climate in Europe,? said HSBC Global Research in a note released on January 16, 2012.
Citigroup Global Markets, another global equity research firm, did not put a number to the valuation, but said that it is very low.
?Currently, the very low earnings of Tata Steel Europe result in a very low enterprise value being ascribed to the European operations, even lower than what is justified by its size and profitability relative to its peers,? said Pradeep Mahtani, an analyst with Citi Investment Research & Analysis, a division of Citigroup Global markets.
Sources in Bank of America Merrill Lynch added that as per the firm?s internal valuations, Tata Steel Europe is valued at around $3.3 billion or R16,267 crore.
Tata Steel Europe declined to comment on valuations.
Tata Steel was catapulted to the club of top five steel producers in 2006 after acquiring Corus for R36,650 crore. The company is the world?s seventh largest steel maker as per the World Steel Association rankings for 2010-11.
However, soon after the acquisition, the economic crisis of 2008 crippled the global steel market, from which Europe has not recovered yet.
The European operations have been a drag on the parent company?s financials. Tata Steel reported a consolidated net loss of Rs 603 crore for the fiscal?s third quarter, even as it had profit of Rs 1,421 crore on a standalone basis.
The European operations had an operating loss or negative earnings before interest, tax, depreciation and amortisation (Ebitda) of Rs 732 crore in the quarter.
?Europe hasn?t been able to recover since 2008 and this has hurt European steel makers including Corus,? said a consultant with a global consultant. He can?t be quoted on individual companies. ?Demand is not growing as there are no major infrastructure projects and private construction companies struggle to fund new projects. Corus or Tata Steel Europe, I feel, has realised the challenges and have started scaling down both in terms of production and workforce.?
Real steel consumption is projected to fall 0.5% in 2012 and grow 2.5% in 2013, according to Eurofer, a panel representing all of EU?s steel producers. Eurofer?s statistics reveal that real steel consumption had fallen in 10 out of 16 quarters since the first quarter of 2008 fiscal.
?The outlook for 2012 reflects the downward revisions for investment demand in the EU and softer prospects for the global economy and international trade,? said Eurofer in its outlook released on February 3.
The slowdown in steel demand in Europe saw ArcelorMittal shutting down two of its blast furnaces October 2011. This was the first time the company took such an action since 26.9-billion euro merger of Mittal Steel and Arcelor in 2006.
Tata Steel Europe has also been taking such measures. In 2011, it closed two blast furnaces at Queen Bess in Scunthorpe, England. The company has also been reducing the workforce of its construction steel division, a sector particularly hit by the European sovereign debt crisis.
Europe has been making steel for over 200 years, but the the industry now faces severe challenges in face of demand growth coming to a grinding halt in the continent.