HANDELSBLATT EXCLUSIVE

ThyssenKrupp Nears Decision on Tata Merger

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Deconstructing ThyssenKrupp, one of Germany's leading industrial conglomerates. Picture source: Reuters

Industrial giant ThyssenKrupp will make a decision about merging its steel unit with competitor Tata Steel Europe by the end of the fiscal year in September, according to Handelsblatt sources at the German conglomerate. Heinrich Hiesinger, CEO of ThyssenKrupp, plans to fly to India in July to hold face-to-face talks with Tata chief Natarajan Chandrasekaran to determine if a deal can be reached, sources said.

ThyssenKrupp declined to comment. Negotiations to merge Tata and ThyssenKrupp’s steel units have been running for nearly two years, but the companies have been unable to reach an agreement. The talks have been complicated by Britain’s decision to leave the European Union, a change of leadership at Tata and the political uncertainty from the snap elections in Britain. Tata Steel Europe has locations in Britain and the Netherlands.

“The investors and the [company’s] own team needs clarity finally,” a senior manager at ThyssenKrupp told Handelsblatt.

03 p5 ThyseenKrupp and Tata Steel-01

Representatives of both companies believe the chances that an agreement can be reached during the July talks are good. Mr. Chandrasekaran, who took over the reigns at Tata in February, strongly supports a merger of the two companies’ steel units, according to those who know the Indian conglomerate.

The sale of ThyssenKrupp’s steel unit is a key part of Mr. Hiesinger’s strategy to shore up the German industrial giant’s balance sheet. ThyssenKrupp’s equity has dwindled to €2.3 billion, due in no small part to the travails of its steel unit, and could evaporate completely if there’s another downturn. ThyssenKrupp wants to keep its stake in a merged company under 50 percent to remove the steel unit from its balance sheet and boost its equity.

Though the steel unit still generates a fifth of ThyssenKrupp’s annual revenues of €40 billion, it has been slammed by overcapacity in the European market in recent years. Revenues from steel production and trading nosedived by double digits in 2016 and operating profits plummeted by a third. Mr. Hiesinger wants to pull out of the steel market and focus on ThyssenKrupp’s higher margin business in elevators, car components and factory equipment.

 

03 p5 ThyssenKrupp in Numbers-01

A merger of ThyssenKrupp and Tata’s steel units would allow the companies to better fill production capacity at their plants and dramatically reduce R&D costs. One source said the merger could save around €500 million per year.

Though representatives of both companies believe the prospects for a merger are good, there are still many unanswered questions. ThyssenKrupp and Tata have not been able to look at each other’s books do to competition concerns. As a consequence, the financial risks of a merger remain unclear.

Mr. Hiesinger would prefer to reach a deal with Tata, but if the financial risks are larger than expected, ThyssenKrupp would explore other options, sources said. Mr. Hiesinger has been guarded about alternatives scenarios, but Thyssen could pull old plans out of the drawer, such as a partial sale to interested parties in Asia and Eastern Europe or an initial public offering.

The talks have stumbled over the financial risk posed by Tata’s pension obligations to British steel workers. Tata has 13.5 billion pounds in its pension fund, approximately 2 billion pounds short to fully cover benefits. ThyssenKrupp has refused to assume any liability for Tata’s pension obligations. The British government could end the impasse by covering the shortfall in exchange for a stake in Tata’s British plants or in the merged steel company, according to sources close to the talks.

Mr. Hiesinger also faces resistance from the steel unit’s 27,000 employees, who are worried about the financial risks. Works council chief Wilhelm Segerath warned against “a senseless and high-risk merger at the expense of German steel workers.” Knut Geisler, head of the North Rhine-Westphalia chapter of the power IG Metall trade union, said consolidation would just shift production to Tata or China.

Though there are still significant obstacles to a deal, UBS steel analyst Carsten Riek believes a merger with Tata is the best option for ThyssenKrupp. “The worst thing that could happen to ThyssenKrupp would be to back out and to postpone everything once again,” Mr. Riek said.

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. To contact the authors: murphy@handelsblatt.com and wocher@handelsblatt.com

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