LONDON (Reuters) - Germany’s Thyssenkrupp (TKAG.DE) is optimistic about progress made by Tata Steel (TISC.NS) to restructure its UK pensions liabilities, investors and analysts say, but there are still issues to overcome before the two can merge their European steel assets.
India-based Tata said in May it had agreed the main terms of a deal with the British regulator to cut benefits for its 15 billion pound UK pension scheme - formerly the main stumbling block in merger talks between the two firms.
Though Tata would continue to back a new pension scheme under the terms of a deal that Thyssenkrupp has declined to publicly comment on, analysts and investors say the German firm sees the deal as significantly de-risking Tata’s pension.
Thyssenkrupp is waiting, however, for the final terms, likely to be approved this month, and is also concerned about factors such as political uncertainty in the UK due to Brexit, achieving fair value for its assets, and winning over German unions.
“It seems like the pension deal is good enough (for Thyssenkrupp),” said one top-20 Thyssenkrupp investor. A top-10 investor and two other top-20 investors contacted by Reuters were also optimistic about the pension deal.
Thyssenkrupp and Tata Steel declined to comment.
On a recent roadshow with investment bank Jefferies, Thyssenkrupp’s chief financial officer “communicated confidence that a merger with Tata is nearing as progress is made to restructure Tata’s UK pension”, the bank said in a note.
Jefferies estimates the merged entity could save 500 million euros through synergies.
A source familiar with Thyssenkrupp’s thinking said CFO Guido Kerkhoff was guiding the market that merger talks were well advanced. A separate source said Thyssenkrupp had stopped working on a ‘plan B’ should current talks fail.
Kerkhoff recently told the head of Thyssenkrupp’s steel works council the firm will make a decision on its Europeansteel merger by end-September. Merger talks have been underway for nearly two years.
Thyssenkrupp is encouraged that the new pension scheme Tata will back will start off in surplus, analysts say.
This is thanks to a 550 million pound payment Tata will make into the scheme, and to benefit cuts such as linking future pension payout hikes to a lower measure of inflation - a move that will save more than 2 billion pounds.
Thyssenkrupp is waiting, however, for details on other terms, including a 33 percent equity stake that the new pension will hold in Tata’s UK business.
This could translate into a stake in a merged entity, making the pension scheme an additional part-owner in a company one investor estimated would be worth 4 billion to 5.5 billion euros (£3.5 billion to £4.8 billion).
Tata and Thyssenkrupp are keen to combine their European operations in order to cut costs, tackle over-capacity and achieve industry consolidation. Thyssenkrupp’s ultimate plan is to exit steel altogether by spinning off the joint venture.
“A 50/50 (or less) type of joint venture remains the favoured structure from Thyssenkrupp’s side. Thyssenkrupp could shift up to 3 billion euros worth of pensions into the joint venture to rebalance the ownership structure,” Deutsche Bank said in a note.
Thyssenkrupp’s European steel business is more valuable thanTata‘s, meaning it can offload 3 billion euros worth of pension debt in order to split the joint venture on a 50/50 basis or less, analysts and investors say.
One investor close to Thyssenkrupp said a “a sub-50 percent holding” for the German firm is a “very real possibility”.
Thyssenkrupp’s shares, trading at two-year highs, rose 5 percent on Monday on German press reports that a merger decision is near.
However, over 18 percent of shares available for shorting are out on loan, according to data from FIS’ Astec Analytics, signalling that some investors believe the price will fall.
”We believe the future of Thyssenkrupp is not steel, it’s technology,“ senior portfolio manager Ingo Speich of shareholder Union Investment said. ”Steel production only makes sense if you can release scale benefits.”
Additional reporting by Arno Schuetze, Tom Kaeckenhoff, Georgina Prodhan, Maiya Keidan and Pratima Desai; editing by Susan Thomas