home Advertise
With Us

Tata Steel announces $1.6 bn goodwill impairment charge; move to aid fund raising in US markets

MUMBAI: Tata Group flagship Tata Steel has announced a $1.6-billion goodwill impairment charge for the loss of value of


Tata Steel Europe




 (TSE), formerly Corus, and other overseas assets in Thailand and South Africa in the wake of a slump in demand across major overseas markets, particularly Europe. The final figures will be part of the annual numbers due on May 23, when the company announces its Q4 and annual results.



"The impairment is primarily due to a weaker macroeconomic and market environment in Europe where the apparent steel demand has fallen significantly in 2012-13 by almost 8%, which in aggregate results is almost 30% since the emergence of the global financial crisis in 2007. The above underlying condition is expected to continue over the near and medium term and has led to the downward revision of cashflow expectations underlying the valuation of the European business," Tata Steel said in a late evening statement. 

According to its 2011-12 annual report, Tata Steel's consolidated goodwill stood at Rs 17, 354 crore ($3.2 billion) and a lion's share of that was on account of the $13-billion Corus acquisition in 2006. In effect, therefore, Tata Steel has written off half of its goodwill accrued. 

Earlier this month, Tata Steel's Thai subsidiary, in which the company has a 70% stake, took a $120-million write-off. The move was widely seen as a precursor to a much larger write-off in Europe. 

A goodwill loss occurs when the purchase price is higher than the net asset value of the acquired entity. 

Monday's move is not just a financial decision but a strategic and managerial one, say analysts, enabling Tata Sons Chairman Cyrus Mistry to sell some Corus assets. 

"Logically, they should write off the entire amount in one shot. The goodwill is bloating the balance sheet," said a senior analyst from one of the largest FIIs. "Tata Steel may want a break from the past and give a clean slate to the new MD (of the company), due this September. A write-off will also make it easier to sell assets now, but will make further reinvestments in Europe that much more difficult to justify," he added. 

While the possibility of a write-off was being considered for quite some time, the immediate trigger for the decision may have been its plans to revive its US dollar bond issuance. Last month, the company raised S$300 million (Rs 1,300 crore) through an international bond offering at a coupon rate of 4.95%. 

However, the Singapore fund-raising was not the original plan. Instead, Tata Steel planned to raise a billion dollars through a US dollar bond issuance in April to fund the Corus operations, said three independent sources familiar with the matter. The company had even shortlisted a consortium of six banks - Standard Chartered, 
Deutsche Bank, BNP ParibasBSE 0.00 %, Citi, RBS and 






 - for the offering under a section of the securities code known as 'Rule 144A/ RegS bonds' that refers to sale to institutional investors. The exercise was codenamed 'Project Abja.' Abja in Sanskrit means billion.



Abja Investments is also a Singapore-based wholly owned arm of Tata Steel, through which the recent bond offering - its first foreign fund-raising in three years - was launched in the US market.

The banks had provided a backstop for the 10-year bond issue at 5.375% and the offer was valid till May 7. The term backstop means a hard underwriting by which banks agree to make up the shortfall if there is a lack of demand for the corporate paper at that specified price. 

But eventually, the plans to tap the US market did not fructify as the bank's legal advisors - Cleary Gottlieb Steen & Hamilton (CGSH) - expressed reservations and offered to promise only a qualified opinion on the issuance, said one of the sources mentioned above. He spoke on condition of anonymity as the talks were private. In the past, the law firm has worked with the 
Tata Group on several corporate assignments. 

There was a difference of opinion between the company's management and the law firm over two main issues: a potential impairment charge for 


Tata Steel Europe




 and a possible disinvestment of some of its units, the official added. While the lawyers wanted an explicit disclosure in the offer document, the management is believed to have had some reservations. The issue of the impending impairment is believed to have cropped up when Tata Steel shared a report with CGSH as part of the legal diligence for the proposed issuance. The report by Tata Steel's auditor, Deloitte Haskins and Sells, referred to the goodwill write-off as a discussion item under review. 

Any company raising money from US investors under Rule 144 A is mandated to seek a legal opinion under Section 10(b) 5. The legal advisors are expected to conduct a diligence and thereafter state any immediate or even imminent material change in the company. Many believe the lawyer's insistence on a qualified opinion was a key reason why the US issuance was dropped and Singapore was chosen as an alternative destination where the disclosure requirements are less strict. Responding to ET's detailed email questionnaire, CGSH's European Communications Manager Andrew Freeman said the law firm does not wish to comment on the subject. Tata Steel did not respond to specific questions on its discussions with lawyers and the arrangers to the issue. 

But with Tata Steel's management again revisiting its $1-billion US bond issue plans, clearly the call was taken to bite the bullet in order to facilitate the issue. "In the last few days, dialogue between the banks and the company has restarted. The company is seeking the same terms and backstop and to extend the date till mid-June," said an official involved with the ongoing discussions. "Once the banks refresh their support letter, a core group is expected to be formed." 

Though TSE's earning power has significantly shrunk since its acquisition due to prolonged recession in Europe, the sale of Teeside Cast Products UK, more stringent environmental norms and rising capex requirements, Tata Steel had held back from writing off goodwill.

Writing off lost goodwill is a widespread practice overseas. In December 2012,






 wrote down its European businesses by $4.3 billion after the Eurozonedebt crisis hammered demand. In the same year, Nippon Steel and Sumitomo took a $3.1-billion charge on its Japanese operations prior to its merger plans. In March 2013, Tokyo Steel - Japan's biggest maker of steel from scrap iron - widened its annual loss forecast almost nine fold on a $1.3-billion impairment charge related to a plant in central Japan.





However, Indian firms rarely accept that their acquisitions were overpaid for. In 2009, in an unprecedented move, AdityaBirla Group'sHindalco wrote off $1.5 billion worth of goodwill for its Novelis acquisition. Typically, goodwill losses could either be reflected in the profit & loss statement or the balance sheet. In the balance sheet, it could be settled to the share premium account or the general reserve account. Accounting standards stipulate that companies must conduct the goodwill impairment test once every fiscal. In India, firms account for the goodwill loss (if any) in Q4 as it consolidates the results of its subsidiaries for the full year.