Tata Steel's proposed joint venture with Europe's Thyssenkrupp will help it deleverage the group's balance sheet, and refocus its energies on the Indian steel business, where it aims to grow faster and double the capacity. Furthermore, there will be huge cost synergies that the two companies expect to enjoy in Europe post merger.
"As our partnership with Thyssenkrupp progresses in Europe, Tata Steel is well positioned to leverage India’s growing economy by adding significant capacity in value added products to meet emerging customer needs. Tata Sons would continue to financially support Tata Steel’s strategy for capacity expansion through organic and inorganic growth opportunities in India," said N Chandrasekaran, chairman of Tata Steel and Tata Sons.
Steel companies in Europe were hit by slow demand and cheap Chinese exports during 2015-16. Tata Steel, which reported a consolidated loss of Rs 4,169 crore in the year, ended on March 2017, sold its speciality steels business in the UK to the Liberty Group earlier this year. Talks related to its European business had also been ongoing for almost a year.
On Sept 20, Tata Steel and Thyssenkrupp proposed to form a 50-50 joint venture, which would include the flat steel business of the two companies in Europe and the steel mill services of Thyssenkrupp.
The new company Thyssenkrupp Tata Steel will become Europe's second largest steel maker after ArcelorMittal.
The JV would have a pro forma turnover of about 15 billion euros per annum (close to Rs 115,000 crore). Currently the businesses employ about 48,000 people spread across various locations. The JV company would be headquartered in Amsterdam, Netherlands.
The deal involves a non-cash transaction framework, based on fair valuation where both shareholders would contribute debt and liabilities to achieve an equal shareholding in the venture.
"Based on our initial assessment, cost synergies in the range of 400 to 600 million euros per annum may be realised through integration of commercial functions, research and development and other supporting activities. The proposed transaction in Europe will also pave the way for significant deleveraging of the Tata Steel Group’s consolidated balance sheet and provides the platform for Tata Steel to pursue future growth," said Koushik Chatterjee, group executive director at Tata Steel.
Thyssenkrupp Tata Steel would seek to improve capacity utilisation of the network across the three hubs at Ijmuiden in Netherlands, Duisburg in Germany and Port Talbot in Wales and their related downstream facilities.
With initial agreements reached, the process will now move to the next phase in the transaction with due diligence and negotiations on the definitive detailed agreements. The deal would also need all corporate authorisations and approvals from respective boards, shareholders and regulators.
This is not the first such consolidation of regional steel companies in recent times. In June 2017, a group led by ArcelorMittal won the race to acquire Ilva, the Italian owner of Europe's largest steel plant. In 2016, Baoshan Iron and Steel Group and smaller rival Wuhan Iron and Steel merged to create China's biggest steel maker.
Analysts say consolidation in the steel industry augurs well as it is relatively fragmented, compared with its global suppliers of iron ore and coking coal and will help the businesses emerge stronger.
"Synergy numbers stated are a reflection of the reality of the environments the companies are operating in. The combined business, when well integrated, will emerge stronger riding on R&D, advanced technologies, integrated supply chains, differentiated products, complementary markets and customers," said Anjani Kumar Agarwal, partner and national leader, metals and mining at Ernst & Young.
Tata Steel shares closed up by 1.6 per cent at Rs 687.65 on the BSE on Sept 20.
