Mumbai: Ten months after announcing their intention to combine the steel operations of Tata Steel Europe and Thyssenkrupp AG in an equal joint venture, the two companies finally signed definitive agreements last week, with the German partner receiving slightly improved terms than proposed earlier.

The final terms of the agreement took long to hammer out, especially because of recent divergence in performance of the two partners in Europe, which resulted in a “valuation gap". In a concession made by Tata Steel to its German partner, the final deal says that in the event of an IPO of the new company—Thyssenkrupp Tata Steel BV—Thyssenkrupp will receive a higher share of the proceeds, that is, a 55/45 split in favour of Thyssenkrupp.

Only Thyssenkrupp can decide on the timing of a possible IPO. Tata Steel will also remain liable for environmental risks in Britain, where its least profitable Port Talbot factory is based. Neither will revenues from Tata Steel’s Dutch unit be ring-fenced from the merger; a key demand by Thyssenkrupp’s German workforce.

Thyssenkrupp Tata Steel BV is expected to have €17 billion in sales and joint labour force of 48,000 workers. It will be the second largest steel firm in Europe in the flat steel market after ArcelorMittal. Both companies have stated that the JV will help achieve annual synergies of €400-500 million, through joint purchasing including logistics services, higher equipment utilization and reduced administrative expense. However, up to 2,000 administrative jobs and possibly up to 2,000 jobs in production will have to be cut in the coming years at both firms. These reductions would be shared roughly evenly between the two.

Assuming European Commission approval is completed in a standard nine months (inclusive of the secondary investigation), the deal could be final in early 2019, the companies said.

Heinrich Hiesinger, CEO, Thyssenkrupp AG, had come under pressure from activist hedge funds Elliott and Cevian on the slow pace of the deal’s finalization, who were, according to reports in the European press, looking to replace the CEO.

Atanu Mukherjee, president of global metals and energy consultant, MN Dastur & Co, said in a phone interview that the merger is good news for the European steel market. “It increases concentration in Europe and the JV will enjoy better pricing power with 23-24% of the market share. “The joint entity will have an opportunity to wean out sick capacity and make the JV a leaner and meaner entity, that can compete in a market suffering from US tariffs," he added.

Recently US President Donald Trump imposed a 25% tariff on steel imports into the US, creating fears that the Chinese steel production will instead be routed to Europe, creating oversupply and leading to a fall in local prices.

It’s fair that Thyssenkrupp has received moderately better terms in the JV than Tata Steel, Mukherjee said, because there has been significant divergence in performance in the March quarter. “However, I think it’s a great move for Tata Steel in terms of improving its position after its acquisition of Corus in 2007. With this, assets are pooled in a way that maximises value for Tata Steel globally," he said.

For N. Chandrasekaran, chairman, Tata Steel, stitching together this joint venture will be his biggest achievement since taking over at the helm of the Tata group in February 2017. At the final announcement of the deal, Chandrasekaran said: “The joint venture will create a strong pan European steel company that is structurally robust and competitive. This is a significant milestone for Tata Steel and we remain fully committed to the long-term interest of the joint venture company. We are confident that this company will create value for all stakeholders."

“It makes sense that Tata Steel has been selling unprofitable steel plants in Europe, given the market and competition landscape there while at the same time, making acquisitions in India. The company is acquiring and divesting assets, depending on where its operational efficiencies lie," Mukherjee said.

In May, Tata Steel informed stock exchanges that its European subsidiary is looking for buyers for five non-core business areas which operate in niche markets. These units are: Cogent, a maker of electrical steels in Newport, South Wales; Kalzip; an aluminium roofing business in Germany, Firsteel, a processor for coating kitchenware and Engineering Steels Service Centre in West Midlands, UK; Tata teel Istanbul Metals, and Tata Steel Istanbul Metals, a steel coil coating company in Turkey.

The company did not give any indication of potential proceeds from the sale. It did, however, say that the sale would help Tata Steel Europe focus on its core strip products business and on strategic markets.

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