Thyssenkrupp AG and Tata Steel sign deal to create Europe’s number 2 steelmaker

By: | Published: September 20, 2017 12:44 PM

Thyssenkrupp AG and Tata Steel Ltd. reached a framework agreement to merge their European steel businesses in a bid to create the region’s second-largest producer to tackle overcapacity.

Thyssenkrupp AG, Tata Steel Ltd, framework agreement, tata steel merger, European steel business, memorandum of understanding, joint venture, thyssenkrupp Tata Steel, industry newsThyssenkrupp and Tata have been in tie-up talks for more than a year to drive the latest wave of consolidation as steelmakers seek ways to counter overcapacity and cut costs. (Reuters)

Thyssenkrupp AG and Tata Steel Ltd. reached a framework agreement to merge their European steel businesses in a bid to create the region’s second-largest producer to tackle overcapacity. The German and Indian companies have signed a memorandum of understanding for the joint venture to be named thyssenkrupp Tata Steel, which will be equally owned by both parties, and based in the Netherlands, the companies said in statements on Wednesday. The transaction is expected to be finalized at the beginning of next year and will require the approval of the EU.

Thyssenkrupp and Tata foresee annual synergies of 400 million euros to 600 million euros ($721 million), helped by savings on areas including capacity utilization, sales and administration and research and development. The companies flagged the possible loss of up to 4,000 jobs, from a newly combined workforce of about 48,000. The venture would have a pro-forma turnover of about 15 billion euros annually and shipments of about 21 million metric tons of flat steel products, the companies said. No cash would change hands under the proposed combination.

Thyssenkrupp and Tata have been in tie-up talks for more than a year to drive the latest wave of consolidation as steelmakers seek ways to counter overcapacity and cut costs. While prices have recovered since early last year, the industry still faces a global glut caused by large Chinese exports and too much capacity around the world. Benchmark prices in Europe are less than half the level they were in 2008, according to Metal Bulletin Ltd.

Deal Opposition

Shares of Tata Steel jumped as much as 2 percent in Mumbai on news of the deal, extending gains for the year to 74 percent. Investors have mostly welcomed the prospect of Thyssenkrupp finding a partner for its cyclical and capital-intensive steel operations. Still, Chief Executive Officer Heinrich Hiesinger, who is working to transform Germany’s top steelmaker into a more diversified industrial group, has faced some opposition from activists and unions. For Tata Steel, the move would let it focus more on its Indian market, where it plans to grow aggressively.

The deal, which involves combining Tata’s plants in the Netherlands and U.K. with Thyssenkrupp’s German assets, would create a venture that’s closer in size to Europe’s top producer, ArcelorMittal. Activist investor Cevian Capital AB may oppose the venture and instead favor a breakup of the German engineering company, people familiar with the matter said last week. Labor representatives, who have half of the seats on Thyssenkrupp’s supervisory board, have also expressed concern over job losses.

Tata Steel cleared a hurdle for the venture after a U.K. regulator approved a deal to solve a long-running pension standoff, which Thyssenkrupp CEO Hiesinger had said was potentially a major stumbling block to the combination.

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