Hard choice

Announcing tentative plans to merge their European steel operations in a 50:50 joint venture, Tata Steel and Germany’s Thyssenkrupp AG have been at pains to clarify that this merger is driven more by “industrial and strategic logic” than the need for financial engineering or job cuts. Officially, the partners expect Thyssenkrupp Tata Steel to emerge as the second largest steel producer in the high value-added European market. The venture, with a steel capacity of 21.3 million tonnes and €15 billion in revenues, is expected to gain market share and pricing power through an improved product mix and reap cost synergies of €400-600 million a year. The JV’s operating cash flows, it is hoped, will help it pare the debt pile that they are parking in it.

For starters, it is quite clear that, both for Tata Steel and Thyssenkrupp, this merger is more about reducing exposure to the barely-growing and over-supplied European market than specifically focussing on it. Given stronger volumes and better margins at home, Tata Steel is keen to free up the capital from its overseas plants in order to double Indian capacity. When Tata Steel first acquired Corus in 2007, scale and a global footprint were touted as strategic imperatives to make the most of an upbeat global steel cycle. But with the credit crisis decimating growth, Europe in recession and China overburdened with capacity and dumping the excess into the world markets, steel prices have since collapsed. Global operations have become a millstone around Tata Steel’s neck. Thyssenkrupp has been progressively shedding its commodity businesses to focus on high-margin capital goods and this merger seems to be an intermediary step to a complete exit. It is also difficult to deny that financial considerations are at play in this merger, with both partners looking to de-leverage their balance sheets. One of the reasons for the unusual 50:50 structure could be that, without a controlling stake in the JV, both partners could gain accounting leeway not to consolidate their numbers. The merger may have a rough passage with external stakeholders too, with labour unions and the governments of UK and Germany already looking to ring-fence their interests.

Given all this, with the Chinese export threat continuing to loom large, it is unclear how this joint venture will pay off without pricing sacrifices, or cost and job cuts. In short, the Tata-Corus episode is a good lesson for India Inc that cross-border acquisitions, for all the national pride and romanticism they generate, ultimately succeed or fail based on hard commercial considerations.

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