Germany’s Thyssenkrupp and India’s Tata Steel agreed yesterday to merge their European steel operations in a preliminary deal that would create the continent’s No.2 steelmaker after ArcelorMittal.
The deal will not involve any cash, Tata Steel said, adding that both groups would contribute debt and liabilities to achieve an equal shareholding and remain long-term investors.
The companies say they need to consolidate to address overcapacity in the European steel market, which faces cheap imports from China and elsewhere, subdued demand for construction and inefficient legacy plants.
“We want to avoid our steel team restructuring itself to death,” Thyssenkrupp CEO Heinrich Hiesinger told reporters, noting its steel operations would face deeper restructuring needs if they remained part of the group.
“No one is able to solve the structural issues in Europe alone. We all suffer from overcapacity and that means that everyone is making the same restructuring efforts,” Hiesinger told broadcaster n-tv.
Thyssenkrupp shares rose 3.2 per cent, boosted by hopes that the joint venture will also ease the burden on its balance sheet, which will be freed from €4 billion in mostly pension liabilities. Tata Steel shares rose 1.7 per cent.
“This is a key positive catalyst supporting our thesis that Thyssenkrupp’s core capital goods operations deserve a meaningful re-rating,” Jefferies analyst Seth Rosenfeld wrote in a note, reiterating his “buy” rating.
Thyssenkrupp also has profitable businesses in elevators and high-tech car parts.
Yesterday’s memorandum of understanding, widely expected after Thyssenkrupp last week said a deal could be reached this month, outlines annual synergies of €400-600 million as well as up to 4,000 job cuts, or about eight per cent of the joint workforce. The Essen, Germany-based group, whose operations span construction steel, car parts, submarines and materials distribution, is 15 per cent owned by activist shareholder Cevian and has faced calls to split off other parts of the business, most notably its elevator unit.
Tata Steel Europe had been a strain on Tata Steel Ltd for a decade, causing the parent to burn cash at a rate of approximately $1 billion a year.
Pooling its operations with Thyssenkrupp would ease Tata Steel’s debt burden, freeing up cash flow to allow it to invest to meet growing steel demand in India.
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, which have lasted more than a year-and a-half.