Thyssenkrupp seals landmark deal with Tata Steel

Vidya Ram London | Updated on June 30, 2018

The deal forms the core of Thyssenkrupp CEO Heinrich Hiesinger's plan to turn the conglomerate into a technology company. File Photo   -  Reuters

The joint venture forms the core of CEO Heinrich Hiesinger's transformation plan

The long-awaited merger of Tata Steel and ThyssenKrupp is set to go ahead, as the two firms signed a definitive agreement for a 50-50 joint venture, creating Europe’s second largest steel company after ArcelorMittal.

The deal was a “strong answer to the challenges in the steel market,” and would create 5 billion euros in additional value to both firms, the companies said. The announcement came after ThyssenKrupp’s supervisory board gave the approval for the deal late on Friday, following a number of concessions to reflect a “valuation gap” that had developed between the two entities.

Merged entity

The company created in the 50-50 joint venture is to be called ThyssenKrupp Tata Steel and will be managed by a Netherlands based holding company. It will have around 48,000 workers and an estimated 17 billion euros in sales.

Synergies are expected to be in the region of 400 million euros to 500 million euros. The deal included “proper compensation” for the value gap, including the agreement that in the case of an IPO, Thyssenkrupp would receive a higher share of the proceeds, reflecting a 55: 45 ratio in favour of Thyssenkrupp.

Thyssenkrupp would also have the right to “exclusively decide” on the timing of an IPO. A number of activist investors in Thyssenkrupp had pushed for more favourable terms for the company in recent weeks.

"The joint venture will create a strong pan European steel company that is structurally robust and competitive,” said Natarajan Chandrasekaran, Chairman of Tata Steel. “This is a significant milestone for Tata Steel and we remain fully committed to the long-term interest of the joint venture company.

“With the joint venture we create a highly competitive European steel player – based on a strong industrial logic and strategic rationale. This will help secure jobs and value chains in European core industries,” said Heinrich Hiesinger, CEO of Thyssenkrupp.

Pressure on the industry

The joint venture comes as Europe’s steel industry faces new pressures, following the introduction of 25% tariffs on steel imports by the United States on June 1. In addition to hitting sales for European companies to the lucrative, high-value-added US market, the tariffs regime is expected to result in further produce being dumped onto the European market as low cost producing countries such as China struggle to find a market for supplied.

The EU is investigating whether its safeguards regime against dumping is adequate, though a number of other industries -such as the automotive,, and construction sectors – have pushed back against tough measures, arguing it wouldn’t be in the interests of European consumers.

Tata Steel’s UK unions welcomed the deal announcement, including commitments made to the unions that the new venture would result in significant investment across the UK steel business, including a repair of one of Port Talbot’s blast furnaces, and a commitment to avoiding compulsory redundancies till October 2026, and the first £200 million of any operating profit being invested back into the business.

“This venture will only succeed if the necessary strategic investments are made to allow the business to thrive,” said Roy Rickhuss of the Community union. “We will be seeking guarantees over jobs and investment of the UK operations of the joint venture to secure the future of UK steel,” said Tony Brady of the Unite Union.

“For this joint venture to really succeed and to guarantee the longer term future of the plant, and the UK Steel industry, sustained investment in the plant is needed over and above the currently committed work on Blast Furnace 5,” said Stephen Kinnock the MP for Aberavon, where the Port Talbot plant is located.

Published on June 30, 2018

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