The primary reason for the deal between Thyssenkrupp and Tata Steel was to establish three manufacturing bases in the UK, Netherlands and Germany, said Tata Steel CFO, Koushik Chatterjee.

Allaying fears about activist investors such as Elliott Capital raising questions about the deal, he said "I think we have a lot of things which will go in favour of this joint venture as and when it kind of gets formed. It has the potential to create value for all shareholders and stakeholders and therefore I think seeing is believing and that is what would come through in the years to come."

Saying that the company would adapt to any changes that affects Europe, including Brexit, he said the company was in a strong position as it had strong fundamentals.

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Sanjay: You ventured into this political marriage within the context of a political or this business arrangement rather in the context of a political divorce with business implications, is that a risk?

A: Not really, I think we have a very strong underlying industrial rational and the frame of this joint venture is to ensure that we have three hubs in Netherlands, Germany and UK.

Therefore the principle of this joint venture is built on ensuring a seamless transition into one company and given the fact that trade issues and regulatory issues are fact of life. I think that the underlying strategic rational will certainly hold out. I presume you are meaning Brexit, and it may have may be a positive advantage at a later point in time.

Sanjay: Even if there is no deal?

A: We don’t know the contours of the deal. If there is a status quo then we are fine. If there is anything which changes, we will adapt to it. Also because of the fact that there is a domestic market that needs to be serviced and we are ensuring that our capability and asset footprint helps in that process. Therefore that is not too much of a variability in our....

Sanjay: So you do have a plan B?

A: Our plan A is very robust and plan B is a matter of adaptability. As I said that if your asset footprint, your people, the organisation is aligned, we will adapt to any changes that may happen at a later point in time.

Sanjay: Two years back you were planning to sell the business in the UK, now a very different show of confidence. Where is this coming from because there are worrying signs apart from Brexit, you have a continuing issue around dumping and then of course the US tariffs?

A: Two years back, in 2015-2016 the entire steel industry globally was in a very difficult and a challenging situation. A- Things have changed externally. But more importantly things have changed internally in the context of our asset footprint in the UK. We have undertaken a series of portfolio restructuring.

We have launched and well into our transformation program, so from a position where we were negative EBITDA we have moved very significantly to a positive EBITDA and a positive frame.

We have looked at our prioritising our capex, we have looked at our product mix, and we are obviously in a better frame than where we were. UK being part of a larger configuration in the European network there are synergies which can flow both ways.

Nisha: What is in it for the Indian shareholders? When is it going to be earning per share (EPS) accretive because from the looks of it yes you have passed on euro 2.5 billion of debt and your EBITDA on 50-50 basis will be higher because Thyssenkrupp is clocking in higher EBITDA, so net-net is it going to be EPS accretive once the entire merger take shape?

A: This is a collaboration and a partnership that has been built on very strong industrial logic and footprint. I think the Indian shareholders and the company will be in a much more financially robust position.

Not only are we going to look at deleveraging on the deconsolidation of about euro 2.5 billion of debt. We will have consolidated interest cost which will come down by about maybe Rs 1,000 crore.

We create balance sheet appetite for the growth in the Indian business and therefore I think it will certainly have earnings accretive position. Not to mention about the fact that as a 50-50 joint venture when we accounted on an equity basis we will have the earnings of the joint venture company.

Our expectation is also that it will be a free cash flow business from which shareholders will be duly serviced. So, structurally and otherwise this is a best of both world’s solution for Tata Steel.

Nisha: You have said synergies of 400-500 million euros per year, is that expected to clock in from the very first financial year of your operation as a merged entity?

A: There are certain synergies which has the potential to start faster than the others, for example there are ones which are the procurement synergies and synergies on account of the network, these are the ones which will come in possibly first.

Then there are synergies which will flow in as we go along. Our estimate is it will take 2-3 years to mature on the numbers that we have guided for. However the proximate synergies are very strong given the fact that both enterprises are serving the same market with similar cost structure and in the same continent.

Nisha: In the first year how much synergy are you expecting and will it be EPS accretive from the very first day of merger or not?

A: It would help the EPS of Tata Steel because of the issues relating to savings in interest costs on account of the synergies starting to flow in. I would not give an exact number on this because we are detailing on the joint business plan that has been prepared by the teams.

Over the next few months subject to the guard rails on the regulatory issues on anti-trust we still are two separate companies and till all the approvals of the European Commission comes through we will find ways into ensuring that when we do close this transaction and the joint venture starts, we will start realising synergies as fast as we can.

Nisha: Is there a potential risk because the activist shareholders like Elliott have raised a lot of concerns because according to them the deal is in Tata Steel's favour?

A: I would not like to comment on that because it is essentially an internal matter of Thyssenkrupp. All that we can say is, this transaction and this joint venture is founded on very strong industrial rationale, it is going to be one of the champions in steel in Europe.

I think we have a lot of things which will go in favour of this joint venture as and when it kind of gets formed. It has the potential to create value for all shareholders and stakeholders and therefore I think seeing is believing and that is what would come through in the years to come.

Nisha: Is there approval required for this merger to go through?

A: Yes, like in any geography, any merger requires anti-trust clearance, so we do require merger control clearances from relevant jurisdictions where each of the entities operates or each of the entities that gets impacted, that is the customary one, including the EU. So, that is a process that will happen from now on and it will take some time before that clearances come through.

Nisha: About your debt management, you said that euro 2.5 billion is passed on to the joint venture that will be deconsolidated from Indian entity, so that means Rs 20,000 crore odd going from your overall net debt that you left at the end of FY18 at Rs 86,000 crore, so that will reduce to Rs 66,000 crore, but then you are also buying out Bhushan Steel where you have said that you are taking a debt of Rs 16,500 crore. What are you plans for debt management? Are you comfortable with these levels and with this debt on your books would you still pursue Bhushan Power and Steel?

A: If you have to look at the Bhushan Steel acquisition this has been done on a very prudent capital structure. We have contributed about Rs 18,000 crore of equity, equity related from Tata Steel and about Rs 16,500 of debt, 5 million plus tonne facility with very strong asset configuration especially on the downstream and our market presence and so far we have being starting our integration program there so I think as far as Bhushan Steel is concerned I think there has been structured on an incremental debt-EBITDA of under 3, so that is certainly resilient.

I think Indian operations are doing very well and therefore on an overall basis, we are replacing debt with the acquisition of fundamentally strong Indian operations as in the acquisition in Bhushan Steel.

Bhushan Power I can’t comment because it is currently in the court, we will see what happens going forward.

Sanjay: In a nutshell how is two together better than one plus one?

A: There are as I mentioned that because of the strong industrial logic the synergies which are what I call proximate synergies are very good, very robust and there are certain synergies which would have not got realised individually by either of these entities, but would get realised when we are together.

As I said we are in the same geography, some cost structure, similar configuration. We are both in flat products so there are these leverages which this joint venture company will certainly maximise and that is why we believe that it is one plus one much more than two.

First Published:Jul 3, 2018 12:20 AM IST