Home / Companies / Tata Steel, Thyssenkrupp to merge European units

Mumbai: German steelmaker Thyssenkrupp AG and Tata Steel Ltd have agreed to merge their European steel operations to create the continent’s second-biggest maker of the alloy, concluding one-and-a-half years of tortuous negotiations.

The deal will not involve any cash, Tata Steel said. Both groups will contribute debt and liabilities to achieve an equal shareholding and remain long-term investors.

ALSO READ: Tata Steel-ThyssenKrupp merger: Can two problems equal a solution?

The agreement to create Thyssenkrupp Tata Steel, a Netherlands-based entity with annual sales of €15 billion, shipments of about 21 million tonnes of flat steel products and 48,000 employees, will allow the Indian partner to reduce debt and focus on expansion in its home market.

The deal, which will create a steelmaker second only to ArcelorMittal in Europe, is expected to be completed by the end of next year after the two companies receive regulatory approvals. The memorandum of understanding signed by the companies outlined annual synergies of €400-600 million (around $480-720 million) as well as up to 4,000 job cuts, or about 8% of the joint workforce.

The agreement to create Thyssenkrupp Tata Steel, an Amsterdam-based entity with annual sales of €15 billion, shipments of 21 million tonnes of flat steel products and 48,000 employees, will allow the Indian partner to reduce debt and focus on expansion in its home market

“It’s a very good outcome from the point of view of all the stakeholders," said N. Chandrasekaran, executive chairman of Tata Sons Ltd, the group holding company. It will put Tata Steel India in a strong position to accelerate expansion and “double its capacity through organic or inorganic route", he said.

The deal marks a personal milestone for Chandrasekaran, who became chairman in February vowing to tackle what he called “hot spots" in the conglomerate, which has businesses ranging from automobiles to aviation and tea to telecom.

In March last year, Tata Steel decided to put its entire UK business on sale in the face of a slump in steel demand and prices, some nine years after it bought Corus Group Plc. for $12.9 billion in the biggest acquisition by an Indian company. Tata Steel Europe, struggling with poor steel demand and competition from cheap Chinese imports, had been a strain on Tata Steel, causing the parent to burn cash at a rate of about $1 billion a year.

“Consolidation in the steel industry augurs well for the business, as steel industry is relatively fragmented compared to its global suppliers of iron ore, coking coal as well as customers," said Anjani Kumar Agarwal, partner and national leader, metals and mining, EY. “The trend of regional consolidation is quite profound—examples include four large combinations in China as well as ArcelorMittal acquiring Ilva, Italy’s largest producer."

With Rs17,000 crore of debt being  transferred to the new joint venture company as a term loan, Tata Steel will be able to reduce some of its Rs74,000 crore consolidated net debt. The company will restructure the remaining debt by other means, said Kaushik Chatterjee, group executive director at Tata Steel.

The initial cost savings of €400-600 million would be a result of common procurement, logistics and network and capacity optimization, said Chatterjee. “This joint venture is not about closures and job losses, it’s about value and growth," he said.

For Thyssenkrupp, the joint venture will ease the burden on its balance sheet, which will be freed from €4 billion in mostly pension liabilities.

The path to the deal was cleared when Tata Steel last month reached a landmark deal that will allow it to reduce £15 billion in British pension liabilities, long seen as the main hurdle in talks between the companies.

“The deal is important for both companies. Thyssenkrupp is a company which has a large capacity, is very well managed and has logistically excellent plants," said an equity analyst at a domestic brokerage.

Thyssenkrupp’s earnings before interest, tax, depreciation and amortization (Ebitda)—an indicator of operating profitability—was around €75 per tonne for the last four quarters and Tata Steel Europe’s around €71 per tonne, the analyst said on condition of anonymity.

“So there is not a huge difference between the two companies. Also, there will be synergies in terms of sourcing and procurement cost. These benefits however, would flow into the joint venture from 2020 onwards," he added. 

The two companies may confront some hurdles. On Wednesday, German labour minister Andrea Nahles said a merger between Thyssenkrupp and Tata Steel should not happen at any cost and the headquarters needed to be in Germany if it did happen, Bloomberg reported.

On Wednesday, Tata Steel’s share prices rose 1.64% to close at Rs687.65 on the BSE on a day the exchange’s benchmark Sensex ended little changed. Thyssenkrupp shares gained 3.2%.

Reuters contributed to this story.

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