ESSEN, Germany/MUMBAI (Reuters) - Germany’s Thyssenkrupp (TKAG.DE) and India’s Tata Steel (TISC.NS) agreed on Wednesday to merge their European steel operations, creating the continent’s No.2 steelmaker with revenues of 15 billion euros (£13.30 billion).
The deal, which is preliminary, will help the companies address overcapacity in Europe’s steel market, which faces cheap imports, subdued construction demand and inefficient legacy plants. The merger will also result in up to 4,000 job cuts, or about 8 percent 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 CEO Heinrich Hiesinger told reporters.
“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,” Hiesinger told broadcaster n-tv.
European steel prices ST-MBEUDNHRC-MB are about 35 percent below their pre-financial crisis peak.
Wednesday’s long-awaited memorandum of understanding (MoU) between the two steelmakers outlines annual synergies of 400 million-600 million euros, though one top 25 investor in Thyssenkrupp expected synergies to be higher.
“The two companies are being very conservative in their estimates,” the investor said.
The new joint venture, Thyssenkrupp Tata Steel, will be based in Amsterdam, with core profits estimated at 1.5 billion euros in the first year.
“Excellent news,” tweeted Dutch Prime Minister Mark Rutte.
It will be Europe’s biggest steelmaker after ArcelorMittal (MT.AS), with combined production capacity of 27 million tonnes, giving it 25 percent market share in Europe, versus ArcelorMittal’s 38 percent share.
Tata Steel Europe had been a strain on its parent for a decade, burning through approximately $1 billion of cash a year.
The Indian parent will transfer 2.5 billion euros 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 Tata Steel to focus on meeting growing demand in India, where Chairman N. Chandrasekaran said it will aim to double its manufacturing capacity in five years through plant expansions and acquisitions.
Thyssenkrupp shares closed up 2.4 percent at 25.86 euros, having earlier hit a high of 26.58 euros, bolstered by hopes the joint venture will also ease the burden on its balance sheet, which will be freed of 4 billion euros 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.
Thyssenkrupp, whose operations span car parts, elevators, construction steel and submarines, is minority-owned by activist shareholder Cevian and has faced calls to split off other parts of the business, most notably its elevator unit.
Cevian declined to comment on the merger, but a source familiar with the matter said it was broadly supportive of Hiesinger’s plan, though it will come down to the nitty gritty of the agreement whether they support it in the end.
Shares in Tata Steel closed up 1.7 percent at 687.65 rupees, having earlier hit a high of 691.80 rupees.
The company reached a landmark deal last month allowing it to set up a new pension scheme, which will reduce its 15 billion pounds in British pension liabilities, long seen as the main hurdle in merger talks that lasted more than a year and a half.
Thyssenkrupp will not be liable for any future funding demands of a new pension scheme sponsored by Tata Steel UK, its chief financial officer said.
The British government and unions said they welcomed the merger so long as commitments made by Tata Steel UK to safeguard jobs and extend blast furnace operations at Britain’s largest steelworks in Port Talbot, Wales, were maintained.
Roy Rickhuss, chair of the steel coordinating committee representing UK unions Unite, GMB and Community, said the unions recognised the industrial logic of the deal, but would still press Tata to confirm it will invest in the Port Talbot steelworks, a vital regional employer.
Earlier this year, Tata made commitments to safeguard jobs and investments in Port Talbot for five years, in return for the unions agreeing to close their final salary pension scheme to future accrual.
Stephen Kinnock, member of parliament for Aberavon, Wales, said he would press Tata to stand by these commitments.
Hans Fischer, Tata Europe’s CEO, said the company was not planning to cut capacity, but to instead focus on higher value products, though he declined to give guarantees about jobs or production at Port Talbot post the five year deal.
Thyssenkrupp in its statement flagged potential additional synergy savings beyond 2020 from upstream steel capacity adjustments and Jefferies Rosenfeld said he believes these “are most likely at Port Talbot”.
“We see opportunities to increase or to at least keep the volumes we have today, because there’s a huge market for high quality steel,” said Fischer.
The MoU will be followed by negotiations about the details of the merger as well as due diligence before a contract can be signed at the beginning of 2018, Thyssenkrupp said.
Negotiations with German unions, who have campaigned against the plans and only this week signalled a willingness to consider them, are expected to be tough and tied to far-reaching job and plant guarantees.
The deal will require approval of Thyssenkrupp’s supervisory board, Tata Steel’s board of directors and European regulators.
Additional reporting by Georgina Prodhan in Frankfurt, Tom Kaeckenhoff in Essen, Toby Sterling in Amsterdam, Maytaal Angel, Carolyn Cohn and Maya Keidan in London; Editing by Jason Neely and Susan Fenton