Port Talbot management buyout bid shows that the British steel industry can save itself

A management buyout is not an easy transaction to bring to success, but it does have the supreme merit of being authentic

Port Talbot management and employees, Tata itself and the British Government as a co-investor could come together in a fruitful partnership (Reuters)

It is good news that a management buyout of the Port Talbot steelworks, with its thousands of jobs at risk, is beginning to take shape. Unofficial reports indicate that Stuart Wilkie, the managing director at Port Talbot, is heading up a buyout team alongside other staff members. This would be the best response to the decision by the current owners, Tata Steel, to ‘explore all options…including the potential divestment of Tata Steel UK, in whole or in parts’. Closure of the plant isn’t mentioned, but obviously it could come to that.

A management buyout is not an easy transaction to bring to success, but it does have the supreme merit of being authentic. It is, to use the old phrase, ‘pulling yourself up by your own boot straps’. Motivation is clear. There is no hint of asset stripping.

There is also encouragement to be had from a successful management buyout by Sheffield Forgemasters in 2005. The company specialises in the production of large bespoke steel castings and forgings. The buyout process, however, took two years. And as is the case with Port Talbot, trading conditions were unfavourable and there was a large pension fund liability. However the sheer determination of the workforce, backed by local MPs, succeeded in rescuing the 200-year-old institution.

Motivation at Port Talbot is clear and can almost be taken for granted. The bigger test is commitment. The sine qua non of a successful management buy out is that the management team itself, together with a substantial number of employees, invests in the new company in a personal capacity. It is not enough, however, to put up a sum of money you can afford to lose. The investment has to be on a sufficient scale that its loss would be painful. That is how the necessary commitment is established.

As for finance on a sufficient scale, I see four possible sources. One is the relevant trades union, Community, which was formed from a merger of the old Iron and Steel Trades Federation with some other craft unions. Community has said it would welcome “prompt discussions with Stuart Wilkie”. And it is a union that recognises that times have changed. It has said that the test for Community is to ensure that “those who have benefited from trade union membership in a traditional sense feel the support provided by their union is relevant to their new journey.” Well, a management buyout is a new journey.

A second source would be Tata itself, which could provide the buyout company with the funds that it needs to meet bills and cover losses in the early stages of the transaction. Normally such financial support is paid back out of profits in years three to seven. Frankly this would not be an attractive deal from Tata’s point of view because of its obvious risks, but as a major player in an industry where re-structuring often causes social problems and thus brings the intervention of governments, Tata might think it worthwhile demonstrating good citizenship in this case.

Next in line for providing the necessary funding comes the British government. Sajid Javid, the Business Secretary told the House of Commons that the government was looking at “the possibility of co-investing with a buyer on commercial terms”. And he added: “investment can take a variety of forms, for example it could be debt.”

Now if these three sources of funds – the Port Talbot management and employees, Tata itself and the British Government as a co-investor come together in a fruitful partnership, then the possibility of a fourth source of funding becomes apparent – private sector investors. I refer to what are known as private equity firms that specialise in ‘recovery’ situations. They might either be brought into the share capital of the management buyout from the start, but their entry would be more likely two or three years down the road. From Port Talbot’s point of view, it would be very valuable to have an additional source of funding waiting in the wings.

But the government needs to do more than just provide some much needed financial help; it should change the way it thinks about Port Talbot. For whereas the management buyout team led by Mr. Wilkie believes it is looking at an opportunity, daunting though it may be, government ministers talk in terms of a rescue, with all the negative connotations that such a word carries. The Government should buy into the management’s vision for the future.