Money on table

ThyssenKrupp may renegotiate Tata steel merger

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Feeling the heat. Source: Reuters

The long-planned merger of the European steel operations of ThyssenKrupp and Tata faces new challenges that jeopardize the bosses’ self-imposed deadline to close by the end of this month. The German conglomerate has seen a resurgence in its steel business, while Tata’s business has declined, opening up a huge valuation gap from the original agreement.

Goldman Sachs has submitted an estimate to ThyssenKrupp that its business is worth somewhere in the range of half a billion euros more than originally agreed. Company management is already discussing possible remedies with Tata, sources said. The company’s supervisory board will weigh this issue at a meeting scheduled for Wednesday.

The new snag comes as Chief Executive Heinrich Hiesinger faces increased pressure from investors to get on with his restructuring of the conglomerate. New York hedge fund Elliott Management has acquired a stake in the company and initially called for Mr. Hiesinger’s ouster.

A further delay would certainly not please investors who are already impatient with the CEO.

ThyssenKrupp labor leaders, who were bought off earlier this year with significant concessions and guarantees, are once again growing restive about the deal in light of the new valuations. There is no guarantee that the labor members who make up half the supervisory board in Germany’s co-determination system will go along with management’s plans. They worry that German workers may end up paying for Tata losses in Britain.

One possible solution to closing the valuation gap would be for ThyssenKrupp to transfer more pension liabilities or debt to the 50-50 steel joint venture. But that also makes labor representatives uneasy, since the venture’s success is far from assured.

In the meantime, Tata workers in the Netherlands and Britain have mobilized against the deal, arguing it is not good for the workforce. The chairman of Tata’s works council in the Netherlands, Frits van Wieringen, warned that talks there could go on until August, Reuters reported. Mr. Hiesinger originally wanted to close at the beginning of this year and postponed it to June to resolve labor issues in Germany. A further delay would certainly not please Mr. Singer and other investors who are already impatient with Mr. Hiesinger.

It is one of the reasons the boss is in a hurry to close the steel deal. He wants to start restructuring the company. Reports last week said that ThyssenKrupp was planning to sell or shut down its shipbuilding division after it was excluded from bidding for Germany’s new generation of battleships. Mr. Hiesinger wants to move on to the company’s post-steel phase, focusing on its industrial products, particularly elevators.

Mr. Singer, the investor, has sharply criticized the company for what he sees as a bloated headquarters staff and the slow pace of revamping. “If the German national team hadn’t won a game for so long, would it still have the same coach?” a fund manager at Elliott said in a Handelsblatt interview last week. Elliott, looking at earnings results over just the past 12 months, thinks ThyssenKrupp’s steel business is worth €1.9 billion more than Tata’s.

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Other investors are equally impatient. Cevian investment fund, which has an 18-percent stake in ThyssenKrupp, has been pushing for faster action for some time. Cevian managing partner Lars Förberg suggested at one point spinning off the prosperous elevator business.

Mr. Hiesinger’s step-by-step strategy is at odds with these impatient investors. Insiders say the chief executive didn’t want to overwhelm the workforce with too much change at once. The Tata deal has been more than two years in the making. But as time goes on, it’s harder for Mr. Hiesinger to blame the company’s problems on previous management. The Industrial Solutions division, for instance, profited for years from old contracts for plant engineering, but has had trouble drumming up new business.

However, offloading the cyclical steel business and cleaning up the company’s balance sheet would give it more room to maneuver quickly. Insiders say there could even be targeted acquisitions in the higher tech products like elevators, engineering, and auto components. But the restructuring will have to continue. Along with shipbuilding, there is talk of getting rid of the materials services, which supplies raw materials to third parties and helps to manage supply chains.

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Martin Murphy and Kevin Knitterscheidt cover industry for Handelsblatt. Darrell Delamaide adapted this into English for Handelsblatt Global. To contact the authors: murphy@handelsblatt.com and knitterscheidt@handelsblatt.com.

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