Tata steel crisis: Government offer to take a 25% equity stake
Tata’s sale process is getting more complicated by the day.
With just one week left before indicative offers are due, the Government outlined a package of support supposedly worth hundreds of millions of pounds.
The announcement included a controversial offer to take a 25pc equity stake, as well as a debt package and help on energy.
On the surface, the details were sparse. But behind the scenes, every aspect of the rescue effort is being tested – and fought over.
In our exclusive interview with Alan Rubenstein, the chief executive of the Pension Protection Fund, he tells Channel 4 News the PPF is ready to save Tata’s £15bn pension scheme, if needed.
This option would amount to the biggest claim ever made on the fund, which was set up in 2005. The issue, however, is that in most cases the PPF only takes on schemes when companies have formally gone into administration.
On top of that, unions aren’t keen because it means members get a haircut to their benefits.
It’s worth noting that before the PPF, when companies went bust, you were not only out of a job but also out on your ear when it came to your retirement savings. With the PPF, which is funded through a levy on the pension industry rather than by the taxpayer, most people get their full entitlement. Just to give you a sense of the scale, the scheme now acts as insurance for £1.6 trillion worth of pension liabilities and invests in things as diverse as London’s ‘super sewer’, farming, and the London Gateway port. In truth, financially it’s doing quite well.
The drawback of the PPF is that it only pays 90pc of entitlement if you haven’t yet retired.
And that’s not all. Tata’s pension has an extra snag. As the legacy British Steel Pension Scheme, its benefits are much more generous than the legal requirement. This means some of its members could face a 30pc cut in what they expected from their retirement if the PPF were to takeover.
What the Government is desperately working on is how to do a deal that would offer members more than they would get in PPF – but perhaps trim benefits from where they currently stand. Tata meanwhile, want to dump the scheme without pushing the whole business into insolvency. There is precedent for a called compromise deal, but the regulator, the trustees and the PPF would all have to sign up.
Those close to the negotiations suggest that Business Secretary Sajid Javid could afford to be tougher with Tata, given the Indian company has stressed its reluctance to walk away. They complain the company is yet to provide any of the actuarial details outlining the pension’s funding position. One potential bargaining chip could be an obscure detail in how Tata paid down the pension deficit. Sources believe it gave a charge over its profitable Dutch business to the pension fund – making it harder for Tata to cut lose the scheme without an amicable agreement.
Meanwhile, back in Wales, the tech entrepreneur Terry Matthews lent his support to the management buy-out plan fronted by Stuart Wilkie. A dedicated Welshman (he’s behind the Swansea Bay regeneration project) and not short of confidence, he declared he had “started up” 140 companies with only seven investments ever going wrong. No doubt Mr Wilkie will be hoping Mr Matthews pledges some of his fortune as well as his advice.
Because whatever the Government’s support package, the truth is bidders will have to be ready to come up with a significant amount of investment if they want to put Tata’s business back in the black.
The information memorandum details £150m of cost savings but hasn’t said how much capital investment would be required. The losses across the UK amount to about £300m a year across. And even in South Yorkshire, where Tata have a successful speciality business that provides parts to aerospace and defence, it is thought the division is in the red to the tune of around £70m a year.
At this stage the turnaround plan on the table is not that different to what management consultants McKinsey put together last year. For example, insiders say the Government has verbally promised to fund a £120m embedded power generator at Port Talbot, which was outlined in the McKinsey report.
This would help shave off roughly £20m a year in energy costs and because that could be seen as an ‘energy efficiency grant’ taxpayer’s money could be spent without falling foul of state aid rules.
Ultimately, however, a new buyer is going to have to come up with a fresh strategy for making British steel profitable again. Thanks to the global glut in capacity, it will be years, not months before that’s an easy job to do. So, Mr Javid may need a quick fix. But it’s unlikely the industry will deliver one.
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