1. Tata Steel, Thyssenkrupp merger: Big debt relief for Indian company; deal to create Europe’s 2nd largest steel company after ArcelorMittal

Tata Steel, Thyssenkrupp merger: Big debt relief for Indian company; deal to create Europe’s 2nd largest steel company after ArcelorMittal

Addressing a press conference, Tata Sons chairman N Chandrasekaran, who is also the chairman of Tata Steel, said that with the proposed JV, Tata Steel India now has a huge opportunity as it can focus on both organic and inorganic growth.

By: | Mumbai | Published: September 21, 2017 6:36 AM
Tata Steel group executive director Koushik Chatterjee with Tata Sons chairman N Chandrasekaran on Wednesday.

Tata Steel and Germany’s Thyssenkrupp on Wednesday signed an agreement to merge their European steel operations in a preliminary deal that would create Europe’s second largest steel firm after ArcelorMittal. The combined entity would have a turnover of about 15 billion euros per annum (Rs 1.16 lakh crore). The 50:50 joint venture will not involve any cash and both groups would contribute debt and liabilities and remain long-term investors. Both companies said 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. The proposed joint venture will also result in significant de-leveraging exercise for Tata Steel as it will transfer 2.5 billion euros of debt to the joint venture company, which according to analysts represents nearly 35-40% of the debt in its European business. Thyssenkrupp on its part will transfer about 3.6 billion euros of its steel pension liabilities to the JV. The culmination of the agreement follows last month’s agreement wherein Tata Steel signed a pact with the trustees of British Steel Pension Scheme to separate the pension scheme from its UK business. The separation of the pension scheme was critical to the merger talks between the two parties.

Addressing a press conference, Tata Sons chairman N Chandrasekaran, who is also the chairman of Tata Steel, said that with the proposed JV, Tata Steel India now has a huge opportunity as it can focus on both organic and inorganic growth. “It gives the opportunity for Tata Steel India to focus on a very aggressive expansion plan… Tata Steel India’s balance sheet will support that. Tata Sons will work very closely with Tata Steel, in fact partner with Tata Steel as required to ensure that we are able to capture both the organic and inorganic opportunities. We will have very a strong company in Europe and we will have very strong company in India with the aim to double the current capacity,” Chandrasekaran said. Tata Steel had an annual crude steel capacity of 27.5 million tonnes per annum as of March 31, 2017. Koushik Chatterjee, group executive director, Tata Steel said cost synergies to the tune of 400-600 million euros per annum could be realised by the JV through integration of commercial functions, R&D and other supporting activities.

“The signing of the MoU with Thyssenkrupp marks an important milestone for Tata Steel Group with regard to wider European portfolio strategy. The proposed transaction in Europe also paves the way for significant de-leveraging of the Tata Steel Group’s consolidated balance sheet and provides the platform for Tata Steel to pursue future growth,” Chatterjee said. He added that both shareholders had taken care to ensure that the balance sheet of the combined venture will be structured to ensure a sustainable business going forward. To be named Thyssenkrupp Tata Steel, the planned joint venture will be managed through a lean holding company based in the Netherlands. It will have a two-tier management structure comprising a management board and a supervisory board. Both boards will have equal representation from Thyssenkrupp and Tata. The co-determination structures in Germany, the Netherlands and Britain will be retained.

The signing of the contract after the due diligence and requisite approvals is expected in early 2018, while the effective start of the joint venture could take place in late 2018 following antitrust approval by the relevant authorities. Heinrich Hiesinger, CEO of Thyssenkrupp, called the JV a step towards tackling the structural challenges faced by the European steel industry. “In Tata, we have found a partner with a very good strategic and cultural fit. Not only do we share a clear performance orientation, but also the same understanding of entrepreneurial responsibility toward workforce and society,” he said. While the Tata Steel management did not elaborate on the possible job cuts in the future, Thyssenkrupp expects that leveraging the cost synergies across the entire entity will require a reduction in workforce by up to 2,000 jobs in administration and potentially up to 2,000 jobs in production over the years ahead. This burden is expected to be shared roughly evenly between Tata Steel and Thyssenkrupp.

Analysts at Indian brokerages have said that the joint venture will help prevent the cash burn which has largely contributed to Tata Steel’s net debt over the years. Between 2010 and 2017, Tata Steel’s consolidated net debt increased to Rs 74,500 crore from Rs 44,400 crore largely due to an increase in the Europe debt to Rs 51,700 crore from Rs 29,300 crore. Kotak Institutional Equities had estimated before the MoU that the combined entity can have a market share of 10-12% in Europe. “Tata Steel’s leverage ratios can improve materially with net debt to Ebitda coming down to 3.8 times against a high of 9.2 times in 2016,” its analysts wrote. Tata Steel reported a strong performance in the three months to June posting a consolidated net profit of Rs 921 crore against a net loss of Rs 3,183 crore in Q1FY17. Revenues grew nearly 20% year-on-year to Rs 30,973 crore. Tata Steel’s performance in Europe was creditable with revenues rising 28% year-on-year to £1,703 million, reflecting improved market conditions and increased sales of differentiated products.

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