ThyssenKrupp and Tata

Trying to Forge a Steel Merger

Tata Steel plant in Port Talbot in Britain Source Bloomberg
A steel factory owned by India's Tata steel in Port Talbot, in southern Wales. Tata says it is considering merging its European steel operations with German rival ThyssenKrupp, according to a person close to the situation.
  • Why it matters

    Why it matters

    Spinning off and combining ThyssenKrupp’s European steel business with that of rival Tata could increase its profitability and make its operations less volatile.

  • Facts

    Facts

    • Faced with falling steel prices, Indian steel maker Tata Steel is looking at merging its European steel operations with ThyssenKrupp, a person familiar told Handelsblatt.
    • The two firms together would have the production capacity of about 22 million tons and become Europe’s second-largest steel maker after ArcelorMittal, excluding Tata Steel’s British business, according to Reuters.
    • ThyssenKrupp sold its U.S. steel operations in 2014 and has tried unsuccessfully to sell its Brazilian steel plant.
  • Audio

    Audio

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German steel maker ThyssenKrupp and Indian rival Tata Steel are looking at combining their European businesses as the global steel industry struggles with low steel prices, overcapacity and cheap Chinese imports.

“ThyssenKrupp is a possible option,” a person familiar with Tata Steel’s operations told Handelsblatt, confirming earlier media reports on Friday in German paper Rheinische Post and news agency Reuters.

“There are however many conditions one has to consider in such a case,” the person cautioned.

Essen-based ThyssenKrupp, whose roots date back to 1811 when Friedrich Krupp founded a steel casting factory, might combine its European steel operations with those of Tata Steel in a new venture, newspaper Rheinische Post reported Friday, citing Berlin government sources. Tata would have an option to buy a majority stake in the venture, the newspaper reported.

ThyssenKrupp was created in 1999, with the merger of Thyssen and Krupp, and oversees Europe’s largest concentration of steel businesses in and around Duisburg in northwest Germany. The companies helped shape Germany’s industrial revolution and produced weapons and equipment for the Nazi regime in the 1930s and 1940s.

“In the Federal Republic of Germany, we can't have a consolidation which leaves the employees behind.”

Wilhelm Segerath, Head of ThyssenKrupp works council

Shares of ThyssenKrupp jumped almost 5 percent on Friday, and were trading down 0.6 percent at 11 a.m. on Monday in Frankfurt.

ThyssenKrupp and Tata Steel declined to comment on the reports. The German company almost went bankrupt in 2010, and has been reorganizing its steel operations to focus on selling technical products, ranging from elevators to automotive systems to wind turbine parts.

“In the steel sector, everyone talks with everyone,” ThyssenKrupp’s chief financial officer Guido Kerkhoff said recently.

The German firm sold its U.S. steel operations in the United States and has made losses on a Brazilian steel plant. It has tried to divest its Brazilian business as well, but has so far failed to find a buyer.

ThyssenKrupp will take full control of the Brazilian plant and buy a 26.87 percent stake owned by Brazilian peer Vale for a symbolic sum, the German firm said Monday. Vale will be entitled to part of the earnings, if the Brazilian business were to be sold, ThyssenKrupp said.

ThyssenKurpp’s Heinrich Hiessinger, who became chief executive in January 2011, has repeatedly said he is open to participate in a reordering of Europe’s steel sector, which is suffering under low prices and cut-throat competition from China.

“The current critical market situation increases the pressure on all market players towards such scenarios,” Mr. Hiesinger told shareholders at ThyssenKrupp’s annual general meeting in January.

Mr. Hiesinger is preparing workers and shareholders for a long-term solution to the group’s steel division – which, with their factories in Europe and operations in Brazil represent a quarter of group sales. For months now, Mr. Hiesinger has been conducting exploratory discussions with stakeholders.

 

Two Steel Giants-ThyssenKrupp Tata Steel 01

 

Tata Steel’s loss-making British operations are a potential hurdle to a deal with ThyssenKrupp. Tata Steel, which also owns operations in the Netherlands, said last week it planned to sell its British subsidiary. The plants in Britain are hopelessly outdated and making losses.

“The (Tata Steel) businesses have to be split up, otherwise a deal with ThyssenKrupp will be difficult,” a steel sector analyst, who declined to be identified, told Handelsblatt.

The British government said last weekend it would offer incentives to a buyer of Tata’s plants by providing aid to cover Tata’s pension obligations and energy costs.

How Tata and ThyssenKrupp could be combined is unclear. Because the Indian company’s European operations, excluding the British plants, would have a lower capacity than the steel division of ThyssenKrupp, Tata would have to inject cash.

Ultimately, Mr. Hiesinger wants the steel business off ThyssenKrupp’s ledger. He needs money to cover pension obligations to steel workers. These are concentrated in the holding company and would stay there, according to company insiders.

Combining Tata Steel’s Dutch operations with those of ThyssenKrupp in Europe would make the venture Europe’s second-largest steel maker after ArcelorMittal, according to Reuters.

The complex nature of the negotiations, inside sources say, makes it likely that a deal could take months or even more than a year, to breathe life into a merger deal between Tata Steel and ThyssenKrupp.

 

131 ThyssenKrupp-WTB 2015

 

Not every joint venture in the past has been a success, some steel sector experts warn.

“We’ll just have to wait and see if it comes to that in the end,” says Marc Gabriel, equity analyst at private bank Bankhaus Lampe. “ThyssenKrupp will do everything possible to play it safe.”

Tata, in a statement, said: “At the moment we’re concentrating on finding a strategic alternative for our business in Great Britain.”

Mr. Hiesinger has said he prefers a joint venture and combination of assets to a takeover. He wants to offload the steel division because he fears falling prices, over-production and increased climate protection measures will make steel production less and less profitable.

Mr. Hiesinger sees ThyssenKrupp becoming a junior partner in any consolidation. Alternatives are difficult.

Listing the business on the stock  market is considered difficult because of the weak industry conditions. As his consolidation plans progress, he will have to be careful to keep his workforce on board.

There have already been angry reactions to speculation of a sale or a merger.

“I hope that we’ll be brought on board in the negotiations, as we were in the past,” the head of the works council, Wilhelm Segerath told Handelsblatt. “In the Federal Republic of Germany, we can’t have a consolidation which leaves the employees behind.”

 

Martin Murphy is an editor with Handelsblatt and specializes in the automotive, defence and steel industries. Martin Wocher is an editor with Handelsblatt, focusing on the mechanical engineering and steel industries. Gilbert Kreijger, an editor with Handelsblatt Global Edition in Berlin, contributed to this story. To contact the authors: murphy@handelsblatt.com and wocher@handelsblatt.com

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