Tata Steel expects the ThyssenKrupp deal to help it combine the best of both worlds - a robust footprint in Europe that will also create a financial appetite to pursue rapid growth in its home market in India. A day after the company signed a definitive agreement with ThyssenKrupp to merge with Tata Steel Europe, Sambit Saha of The Telegraph caught up with Koushik Chatterjee, executive director and chief financial officer of Tata Steel, to understand the financial implications of the deal.

• Tata Steel had a consolidated finance cost of Rs 5,501.79 crore in the last fiscal. Following the transaction, what could be the savings on interest cost for the company?

Once the joint venture is formed, around 2.5 billion euros of senior debt will be refinanced and transferred to the joint venture company. So, on a ball-park basis, around Rs 800-1,000 crore of interest cost will be saved per annum for Tata Steel.

• How much debt will still remain on the balance sheet on account of the overseas operation after transferring 2.5 billion euros and how will that be serviced?

There will not be any debt left in Europe but we will have around Rs 40,000 crore of debt internationally, mostly in our holding companies in Singapore. This includes around Rs 22,000 crore of long tenured international bonds which are backed by Tata Steel.

• Will the dividend income, variable in nature depending on market dynamics, be enough to service the outstanding overseas debt, fixed in nature?

Fundamentally, based on the pro forma earnings, the level of synergies, the likely capex allocation and the capital structure, it is estimated that the joint venture company will generate a fair level of positive free cash flows. This has been validated by the joint business plan work undertaken by the teams of both companies and validated independently by experts. Hence, the assumption that the debt will be serviced from the dividend is a fair proposition.

I look at it a bit differently - currently a material part of the debt servicing is being done by Tata Steel and I expect that the financial burden on Tata Steel will reduce substantially from the dividend earnings once the integration phase of the joint venture is completed in about 2-3 years after theJV is formed.

• What will be the equity structure of the new company given that BSPS (British Steel Pension Scheme) already has a 33 per cent stake in Tata Steel UK? What will be the residual stake of BSPS in the merged entity?

The equity structure of the new company that will be based in Netherlands will be 50:50 joint venture between Tata Steel and Thyssenkrupp. There will be no other shareholder at the joint venture level to start with till the IPO. BSPS is a 33 per cent shareholder in Tata Steel UK and will continue to be so unless there is any dilution trigger. The joint venture company will hold the balance 67 per cent instead of Tata Steel Europe. So, BSPS will not have any equity in the JV.

• How long will the equal JV structure continue? Will it continue till the IPO?

Both shareholders have agreed that we will be in equal joint venture at least till six years in the normal course other than an IPO or certain defined trigger events. So, there is a long-term commitment from both shareholders.

• Will Tata Steel's stake trail Thyssenkrupp post the IPO given that the German company will have a 10 per cent headstart?

Not really. The 10 per cent warrant instrument is a mechanism to monetise value by Thyssenkrupp only in the event of an IPO. The market pays for the value. The way we have structured it is quite innovative. The underlying joint venture will be a 50:50 venture from a substance point of view. In the event an IPO is triggered on which Thyssenkrupp will have effectively an affirmative right, warrants of 10 per cent of the equity capital will be issued by the joint venture company to Thyssenkrupp who would monetise it in the IPO.

The balance portion of equity capitalisation in the IPO will be determined by the joint venture board. So, under this arrangement, at no point in time till the IPO will there be an unequal shareholding.

Even post IPO, unless one party wants to sell disproportionately, both will be equal till six years with an external shareholder base.

• Does Tata Steel plan to remain in Europe over the long term as the company is heavily scaling up operation in India?

The European joint venture is designed to be robust in terms of its asset footprint, potential synergies, ability to serve differentiated customers with a value-added product mix and has the promise of good financial performance. We are committing for the long term in the joint venture.

Financially, however, Tata Steel will achieve structural financial deleveraging with about Rs 20,000 crore de-consolidated from its balance sheet and about Rs 1,000 crore of interest savings per annum. So, in a way it could turn out to be the best of both worlds of having a strong robust footprint in Europe with a potential to ride the upside on dividends and earnings that also creates the financial appetite to pursue growth in India.

• What will be the combined effect of Tata Steel divesting Europe to JV and acquiring Bhushan Steel in India on the balance sheet?

As I mentioned above, the joint venture helps us to structurally de-leverage the balance sheet and provide savings on interest. The acquisition of Bhushan Steel will result in an additional system leverage of Rs 16,500 crore (balance Rs 18,000 crore has been through equity and internal generation) for a five-million-tonne plus per annum capacity with a strong downstream product capability in a growing market. Hence, the balance sheet space for India growth is being created by the deconsolidation of the European joint venture.

• Are we going to see de-leveraging of debt post the Thyssenkrupp deal?

We have a long-term capital structure in mind where we would like to have a net debt to EBIDTA of around 3x-3.25x and a net debt to debt of around 1.2x across the cycle. Currently, we are in a rapid growth phase in India with the acquisitions and the brownfield expansion. As we implement, integrate and consolidate the focus remains on earnings and cash flows from which we will keep de-leveraging the balance sheet to achieve the target capital structure benchmarks.