The Tata Steel, Thyssenkrupp JV deal and the art of compromise
When a Thyssenkrupp Tata Steel BV IPO happens, the valuation may be influenced more by Thyssenkrupp’s performance, especially if it continues to outperform
Tata Steel Ltd’s shareholders won’t mind the compromise. They were anyway keen to see the back of the European steel business, whose losses and debt have weighed on its valuations. In FY18, Tata Steel’s Europe incurred a loss of ₹ 2,164 crore on revenue of ₹ 59,985 crore. The business was to move to a joint venture with Thyssenkrupp AG, which would contribute its European steel business. The consideration was an equal equity stake for both companies.
During the long wait for this JV to be formed, Tata Steel’s performance slipped compared to Thyssenkrupp’s. Some of Thyssenkrupp’s investors and its employee union demanded a better deal to reflect this variance. This caused some uncertainty as Tata Steel’s investors feared the deal could fall through. This column had then pointed out that those fears were overblown.
The revised terms hint at a likely initial public offer for Thyssenkrupp Tata Steel BV, the JV. When that happens, Thyssenkrupp will be issued shares equivalent to a 10% stake. These shares will be sold first in the IPO by Thyssenkrupp, which will pocket the proceeds. Depending on the IPO valuation, the sum will represent compensation for the difference in performance.
This does two things. One, the original deal structure remains with both holding a 50% stake. Tata Steel will be entitled to equal board representation, dividends and other decisions. When an IPO happens, the valuation may be influenced more by Thyssenkrupp’s performance, especially if it continues to outperform. The 10% stake ensures that it gets an additional value for that contribution, but realisable only when an IPO is done.
Post-IPO, the two companies’ stakes will fall to around 45%, with the public holding 10% but they will still be equal shareholders. This ensures that while Thyssenkrupp gets compensated, the two partners’ remain equal shareholders. The company management said that both will own equal stakes in the JV for at least six years.
Both companies will benefit from a lighter balance-sheet and their combined profitability is expected to improve, especially after the estimated cost savings of €400-500 million are realised. Tata Steel will also transfer debt of €2.5 billion to the joint venture. That will also create room in its balance sheet to support capital expenditure in profitable markets such as India.
If investors had doubts on whether a European JV makes sense, these should be dispelled by the steep 25% tariff on exports to the US.
A combined entity should find it easier to cope with such external shocks.