The collapse of British Steel a few weeks ago has put more than 4,000 jobs at risk, with many more potentially threatened further along the supply chain. David Thurlow, from the Corporate Finance team looks behind the headlines, and asks if any more could have been done to save the business.
The history of the modern steel industry in Britain goes back to the 1850s and the Industrial Revolution when Sheffield and Middlesbrough produced 47% of the world’s steel. However, by 1896 the British share of world production had fallen, undercut by cheaper American products – a situation that would be repeated over one hundred years later when cheap Chinese steel flooded the markets.
The history of British Steel ownership has been equally bumpy. It went through two periods of nationalisation (1951 and 1967) and was then de-nationalised (1953 and 1980) and has managed to weather two recessions (1970 and 2008).
The penultimate chapter in the history of British Steel came in 2016 when it was bought from the Tata Group for a nominal £1 by Greybull Capital. The fallout from the most recent situation has brought a few issues to light:
- The government lent British Steel £120 million to pay for an EU carbon dioxide emissions bill. British Steel then asked the government for a further short-term loan of £75 million (later reduced to £30 million) which was refused.
- At the start of its most recent troubles British Steel was in the process of acquiring the French steel maker Ascoval. Despite concerns about affordability, the acquisition went through, which means Ascoval is now owned by Greybull. It would appear that Greybull Capital were effectively trying to fund the acquisition of Ascoval via the UK government- which begs the question: should this have been allowed to happen?
In an acquisition process, due diligence needs to be undertaken, whereby the potential acquirer satisfies themselves that a transaction is entered into after due and careful enquiry, and that all relevant regulatory and legal requirements have been properly complied with. However, there is no generally accepted definition of required procedures for this work and it can vary hugely in its scope. It is for those instructing their accountants or management to make clear what is required from the exercise including the areas to be considered. Clearly in this case it was a case of ‘under-egging the pudding’, since British Steel didn’t have the funds to purchase Ascoval.
- Greybull, via an opaque company called Olympus Steel, lent British Steel £154 million at an interest rate of 9% over six-month sterling Libor. Currently, the sterling Libor is just under 1%, so the loan was approaching 10% higher. British Steel also has loans with the bank at 3% over Libor, so the company owners were charging 6% higher interest rate than the banks.
- British Steel accounts show the company was heavily in debt to Greybull. Now the company is insolvent, Greybull’s loans and interest payments will be lost. So, it is no wonder that Greybull tried to get the government to bail British Steel out.
The whole saga has led many to question whether this all been ethically and morally correct, and if nationalisation would have allowed British Steel to compete better with China’s steel industry?
It is worth pointing out that British Steel still has sections of its operations which are competitive, and there has been interest from National Rail who have put a bid in for a proportion of the business. National Rail are heavily reliant on British Steel for railway systems, which accounts for 97% of steel used on British railway tracks, and Transport for London are also a big client.
National Rail have bid for some “railway critical assets”, although they have said that they would rather that someone bought the whole business. Their offer will not undermine a complete sale of the business.
For British Steel and their potential buyers, it is important that experienced and trusted advisers are in place throughout the transaction, on both sides. One of the first actions for National Rail will be to instruct their advisers to carry out a due diligence exercise to make sure that that the price being paid fairly reflects the assets acquired with no skeletons in the proverbial closet.
If it’s an international transaction then the process may become even more complex, and the need for professional informed advisers is paramount. Getting experts to facilitate transactions involving acquisitions and disposal has become much easier in recent years as worldwide networks of Corporate Finance professionals have developed and expertise in this area has grown, so the prospect of an international business deal need not be as daunting as it once was.