Thyssenkrupp, Tata in Talks on European Steel Tie-Up
Posting Date:[2016-04-01]
FRANKFURT—German engineering conglomerate Thyssenkrupp AG and India's Tata Steel Ltd. have held talks on combining their continental European steel operations, as global overcapacity weighs on prices and profits, according to people familiar with the matter.
The companies have been holding high-level talks for over a year, the people said, adding that Thyssenkrupp's preferred structure might be a tie-up of the two companies' steel assets in a joint venture.
It wasn't immediately clear where the talks now stand, though one of the people said an agreement is unlikely in the short term. If completed, the transaction would help both companies achieve scale and cost savings.
Thyssenkrupp shares rose as much as 7.7% in morning trading Friday after German daily Rheinische Post reported the companies were in advanced talks about a combination. The stock ended the day up 4.9%.
A reduction of its steel exposure would help Thyssenkrupp sharpen its profile as an engineering company with a highly profitable elevator business. Such a move would likely please activist investor Cevian Capital Partners, the company's second-largest shareholder, with a stake of more than 15%. A spokesman for Cevian declined to comment on Friday.
Tata Steel earlier this week said it would explore the sale of its entire U.K. business, a move analysts say could pave the way for a combination of its Dutch assets with Thyssenkrupp's European steel operations.
Should Tata Steel sell its U.K. operations, its European exposure would focus on a Netherlands-based flat-products business, Jefferies analysts noted this week. "Given Thyssen's interest in pursuing consolidation solely with another premium flat-steel producer, we believe this cleaning up of Tata's portfolio may help free up the core Dutch assets for Thyssenkrupp," they said.
Credit Suisse analysts came to the same conclusion, saying a Tata Steel exit from the U.K. would be a prerequisite for any deal with Thyssenkrupp. "This scenario, in turn, could lead to the creation of a 20 million tons high-quality steel producer in Europe and the eventual exit of steel for Thyssenkrupp, with arguably a strong synergy story," they said.
Tata Steel is Europe's second-largest steelmaker by production capacity, after Luxembourg-based ArcelorMittal SA. The company has in recent months announced several rounds of layoffs at its U.K. operations, which include steel mills across Wales and England. It said in January that it aimed to reduce its workforce to 14,000 after consulting with unions about the proposed cuts.
The company employed 17,000 workers just before it began eliminating jobs in 2015.
China has been swamping global markets with low-priced steel, intensifying pressure on Western rivals already reeling from overcapacity. Steel imports from China, the world's largest steel producer, to the European Union have more than doubled over the past two years.
On Friday, Fitch Ratings cut Tata Steel's credit rating, citing rising debt and lower profitability across all regions, especially the U.K. The ratings firm said it would consider a further cut should the steelmaker accrue more debt to close any operations in the U.K. By the same token, Fitch said it might consider upgrading the steelmaker if proceeds from U.K. asset sales were to go toward reducing debt.
Tata Steel finance chief Koushik Chatterjee told the Financial Times this week that the company had taken a charge of about ￡ 2 billion ($2.87 billion) in writing down the value of its U.K. operations to almost zero. The comments was confirmed by a Tata spokesman.
Thyssenkrupp's chief executive, Heinrich Hiesinger, has said in the past that consolidation in the sector would make sense, while stressing that combining assets was more likely than one company acquiring another.
Combining Tata Steel's Dutch plant with Thyssenkrupp's operations could yield €1 billion in annual synergies, Credit Suisse said, noting that the plant would be a good fit with the German company's massive facility in Duisburg, Germany.
Under Mr. Hiesinger's reign, Thyssenkrupp in 2014 sold a steel plant in the U.S. after protracted negotiations, but failed to sell its Brazilian operations.
Activist investor Cevian is supportive of Mr. Hiesinger's turnaround strategy. The investment firm started building a stake in Thyssenkrupp in 2013, sparking rumors that the German company might split up.
