Tata Merger

Making German Steel Great Again

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Mid-sized steel company Georgsmarienhütte wants to forge a new European steel giant. Picture source: Reuters.

With steel prices creeping back from historic lows due to a global supply glut, a German steel executive is trying to gain government support for the creation of a “Deutsche Steel” giant that would place the country’s steel mills under one roof and disrupt the impending merger of ThyssenKrupp’s steel interests with Tata of the UK.

Industry sources told Handelsblatt that Jürgen Grossmann, a former electric utility executive who now runs a mid-sized steel company called Georgsmarienhütte, held talks with officials in the state government of North Rhine-Westphalia last week about getting government-backing for the plan.

The sources said Mr. Grossmann is proposing a merger of his company, GMH Holding, with ThyssenKrupp’s steel division as well as the country’s second-largest steel maker, Salzgitter AG.

Germany's trade unions have voiced concerns that the ThyssenKrupp merger with Tata would create a huge conglomerate in which the union would no longer have much influence

Mr. Grossmann is trying to derail the merger of ThyssenKrupp’s steel mills with Tata Steel, which would create the second-largest steel producer in Europe. While ThyssenKrupp is eager to spin off its steel interests to focus on more profitable businesses, such as armaments and elevators, the estimated €6 billion ($7 billion) price tag for the deal may be beyond Mr. Grossmann’s ability to finance. That is why he is seeking government support.

It’s not just a financial hurdle. There is now a global market for steel, with China accounting for nearly half of world production. European as well as American steelmakers have been pressed to the wall, prompting authorities to impose tariffs on imports.

While the tariffs and a Chinese pledge to reduce exports have given European steelmakers breathing room to concentrate on more value-added products, the oversupply problem hasn’t gone away. One way to deal with this is through mergers that would cut production, but also reduce jobs in the industry.

Suddenly, Europe’s two biggest players, Arcelor-Mittal, and Tata Steel, are controlling more and more of the continent’s production. Arcelor-Mittal, which is based in Luxembourg, recently acquired Italian steelmaker Ilva, which will boost the company’s share of flat steel, which is used in cars and appliances, to about one third of the market.

Tata and ThyssenKrupp have been in talks about a merger for two years. One hurdle had been Tata’s problem with the retirement fund for British steelworkers, whose pension obligations dwarfed the company’s turnover. But last week the British government agreed to step in and signed an agreement to take over those pensions, clearing the way for the British-German merger to proceed.

“We continue to be engaged in constructive discussions with ThyssenKrupp regarding a potential merger of the steel businesses of the respective companies in Europe,” a Tata Steel spokesman said. “However, until a definitive agreement is reached, there can be no assurances these discussions will result in a transaction.”

German trade unions, especially the powerful IG Metall industrial union, have voiced concerns that the ThyssenKrupp merger with Tata would create a huge conglomerate in which the union would no longer have much influence. German companies are required by law to have union representations on their boards, but this would not apply to a company registered in the UK or elsewhere in Europe.

It is obvious to everyone in the industry that overcapacity means substantial job cuts are necessary, but the unions fear that Tata management might decide to place the burden for most of the reductions in Germany rather in in Britain, where it would face political opposition.

Mr. Grossmann argues that the enlarged Tata and Accelor-Mittal will have such market power that smaller firms like his own and Salzgitter may be forced out of business.

Still, Tata’s talks with ThyssenKrupp are so far advanced it is doubtful that Mr. Grossmann can line up sufficient financing and political support for his proposal in a short period of time. His own company reported profits of only €43 million, far short of the amount needed to buy a firm valued at €6 billion without a government guaranteed loan.

 

Martin Murphy covers the steel, car and defense industries for Handelsblatt. Martin Wocher is an editor with Handelsblatt, focusing on the mechanical engineering and steel industries. Charles Wallace adapted this story to English. To contact the authors: wocher@handelsblatt.com, murphy@handelsblatt.com

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