Thyssenkrupp, Tata Steel to merge European units
Annual synergies of $480720 mn and up to 4,000 job cuts likely
German steel maker 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 negotiations. The deal will not involve any cash, Tata Steel said. Both groups would contribute debt and liabilities to achieve an equal shareholding and remain longterm investors.
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 help the Indian partner to reduce debt and concentrate 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 December 2018 after the two companies receive regulatory approvals. The memorandum of understanding signed by the companies outlined annual synergies of €400-600 million ($480-720 million) as well as up to 4,000 job cuts, or about 8% of the joint workforce.
“It’s a very good outcome from the point of view of all the stakeholders,” said N Chandrasekaran, executive chairman of Tata Sons Ltd. It would 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 ran- ging from automobiles to aviation and tea to telecoms.
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,” Anjani Kumar Agarwal, partner and national leader, metals and mining, EY, said. “The trend of regional consolidation is quite profound - examples include four large combinations in China as well as Arcelor Mittal acquiring ILVA, Italy’s largest producer.”
With ₹17,000 crore (€3.5 billion) of debt being transferred to the new joint venture company as a term loan, Tata Steel will be able to reduce some of the ₹74,000 crore consolidated net debt it has. The company will restructure the remaining debt by other means, said Kaushik Chatterjee, group executive director at Tata Steel
The initial cost savings of 400600 million euros would be a result of common procurement, logistics and network and capacity optimisation, 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 euros ($4.8 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 pounds ($20 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 amortisation (Ebitda) — an indicator of operating profitability — was around 75 euros per tonne for the last four quarters and Tata Steel Europe’s around 71 euros per tonne, the analyst added. “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.”
(WITH REUTERS INPUTS)