Thyssenkrupp and Tata Steel forge Europe merger

Germany's Thyssenkrupp and India's Tata Steel agreed on Wednesday to merge their European steel operations to create the continent's second largest steelmaker.

The deal, which is preliminary, will help the companies address overcapacity in Europe’s steel market, which faces cheap imports from overseas, subdued construction demand and inefficient legacy plants. The merger will also result in up to 4,000 job cuts, or about 8 per cent of the joint workforce.

The transaction will not involve any cash, Tata Steel said, adding both groups would contribute debt and liabilities to achieve an equal shareholding and remain long-term investors.

"We want to avoid our steel team restructuring itself to death," Thyssenkrupp chief executive Heinrich Hiesinger told reporters, noting its steel operations would face deeper restructuring needs if they remained part of the group.

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“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,” Mr Hiesinger said.

The new joint venture, Thyssenkrupp Tata Steel, will be Europe’s biggest steelmaker after ArcelorMittal and will be based in Amsterdam.

Joint venture

Tata Steel Europe had been a strain on its parent for a decade, burning through approximately $1 billion of cash a year.

Tata Steel will transfer €2.5 billion of debt to the new company and is counting on dividend income from the joint venture to help service its remaining debt, Koushik Chatterjee, a group executive director, told Reuters.

That will free up cashflow to allow it to invest to meet growing demand in India, where it will aim to double its manufacturing capacity in five years through plant expansions and acquisitions.

Thyssenkrupp shares rose 3.2 per cent, bolstered by hopes the joint venture will also ease the burden on its balance sheet, which will be freed from €4 billion in mostly pension liabilities.

"We believe Thyssenkrupp's medium-term goal is to completely spin-out steel ops, leaving Thyssenkrupp as a near pure-play capital goods business, and today's proposed merger structure is attractively "IPO-able", in our view," Jefferies analyst Seth Rosenfeld said in a note, reiterating his "buy" rating.

Shares in Tata Steel rose 1.7 per cent.

– (Reuters)