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ThyssenKrupp and Tata Steel were providing the “perfect” answer to the challenges facing the European steel industry through the creation of a new “steel champion,” said ThyssenKrupp CEO Heinrich Hiesinger.
The top management of both companies gathered in Brussels following Saturday’s signing of a definitive agreement for a 50:50 joint venture that combines their European steel businesses, creating Europe’s largest steel maker after ArcelorMittal.
“Competitiveness is what we want to achieve,” said Hiesinger, as he pointed to the pressures on the industry in Europe and beyond. “Supply and demand in Europe don’t match. We have significant overcapacity in Europe and worldwide which puts tremendous pressure on the industry,” he said also pointing to the recently introduced US tariff regime that he said threatened jobs in Europe.
In addition to strengthening and providing scale to European operations, the deal allowed Tata Steel’s Indian operations to grow, said Tata Steel Chairman N. Chandrasekaran. “This will create strong structurally competitive organisations: one in India and one in Europe….The joint venture made sense two years ago and it makes tremendous sense two years later.” The companies had both stressed their long-term commitment to the European venture, with an agreement to maintain a majority holding between them for at least six years, he added.
He said the Indian market now had “tremendous” opportunity. “We are going do double down…our intention is to increase our presence in India from 13 million tonnes capacity to around 25 million tonnes capacity,” he said. “The European entity becomes stronger so we can focus on creating a stronger Indian platform.”
The signing of the agreement, comes two years after the companies’ official announcement that they were in talks to merge their European steel operations. The subsequent period involved intense negotiations by Tata Steel with UK authorities to successfully offload their UK pension liabilities. Last minute objections by several ThyssenKrupp investors over the deal – focussed on recent performance of Tata Steel’s European operations and the assets’ consequent valuation – had also threatened to put a spanner in the works.
“You can’t let two quarters decide the valuation of a company,” said TV Narendran, Managing Director of Tata Steel, told this paper, pointing to the investment into upgrading facilities in the Netherlands that had hit recent profitability. ThyssenKrupp’s CFO Guido Kerkhoff also defended the deal, pointing to the 55-45 IPO agreement as offering the “appropriate solution,” for the shifting circumstances.
Under the agreement, in the event of an IPO ThyssenKrupp would receive a 55 per cent share of the proceeds, while Tata Steel would receive 45 per cent. The initiation and timing of any IPO will also be decided by ThyssenKrupp.
Kerkhoff also pointed to the €5 billion in additional value the companies estimated would be created through the 50:50 joint venture.
It was important for the closure of the deal and for the joint venture to build credibility before talk of an IPO ,said Chandrasekaran. Hiesinger said that while the company was currently focussing on closing the deal and harvesting the synergies, there were a number of factors that would be decisive for an IPO, including industrial logic, creating value for shareholders, a secure future for the workforce, and being in keeping with the companies’ culture and heritage.
Headcount reduction
The executives confirmed a headcount reduction of around 4,000, split evenly between the two divisions, which were reflected in consultation agreements with workers. “For the majority of 40,000 employees, this is more secure but we were very honest from the beginning. In order to gain synergies, we cannot avoid that in some locations,” said Hiesinger. Details would be firmed after the deal was closed, he said.
Executives on both sides expressed confidence around their talks with European Commission authorities, over the necessary regulatory approvals. “We cannot judge the process of the European Commission – we have to respect that process. We believe they will act professionally,” said Hiesinger. Regulators were aware of the situation of the steel market and the need for a solution, said Chandrasekaran.
While Chandrasekaran expressed his “strong commitment to the idea of the European Union,” he said it was too early to comment on the impact that Brexit would have on the business. “What kind of form and shape it takes is something we have to watch carefully.”
Hiesinger said that while they hoped for a free market, the fact the joint venture had integrated plants in the UK, Netherlands and Germany made the companies “very flexible” to find an “appropriate solution.”
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