FRANKFURT / DÜSSELDORF (Reuters) – German Thyssenkrupp and Indian Tata Steel signed a definitive agreement on Saturday to build a long-awaited steel joint venture, the biggest change in the European steel industry for more than a decade.
The final agreement comes after months of negotiations since the announcement of a first agreement in September. Both companies hope that it will help them to respond to challenges in the volatile steel industry, including overcapacity.
The biggest deal in the European steel industry since the acquisition of Arcelor by Mittal in 2006 is called the 50-50 joint venture – Thyssenkrupp Tata Steel – around 48,000 workers and around 17 billion euros (15.04 billion pounds) have sales.
Based in the Netherlands, after ArcelorMittal, he will be the second largest steel producer on the continent. It forms the core of Thyssenkrupp CEO Heinrich Hiesinger's plan to turn his steel-to-submarine conglomerate into a technology company.
"The joint venture not only addresses the challenges of the European steel industry," said Hiesinger. "It is the only solution that creates significant added value of around EUR 5 billion for Thyssenkrupp and Tata Steel through joint synergies that are not feasible in a stand-alone scenario."
Tata Steel Chairman Natarajan Chandrasekaran in a separate report The joint venture will create "a strong pan-European steel company that is structurally robust and competitive."
The deal comes about as European steelmakers face tariffs of 25 percent on their exports to the United States, their largest market. This could force the local market to absorb more volume.
Since the tariffs were announced at the end of May, the European steel companies ArcelorMittal, Thyssenkrupp, Salzgitter and Voestalpine lost their shares by 8 to 17 percent.
Hiesinger had been forced by activists Cevian and Elliott to obtain more exposure from Tata Steel, whose European business has performed worse than Thyssen since the announcement of the agreement, resulting in a valuation gap.
Thyssenkrupp said the deal included a "reasonable compensation" for the gap in the mid three-digit million euro range: if the joint venture made a generally anticipated IPO, it would be a larger share of the proceeds.
Thyssenkrupp has also secured the right to a possible license The joint venture aimed to distribute dividends in the low to mid three-digit million euro range.
The German group also said that it now expects annual synergies of between € 400 million and € 500 million from the transaction. Additional synergies are possible by managing investments and optimizing working capital.
Tata Steel will continue to be responsible for environmental risks in the UK, where its Port Talbot plant, the least profitable joint venture company, is based, said Markus Grolms, Deputy Chairman of Thyssenkrupp's Supervisory Board.
He also said that Tata Steel's Dutch entity will be part of the joint venture's cash pooling mechanism. This was an important requirement for the German workers concerned that Tata would give his own workers better conditions in the new company.
"Yes, we want to protect people, but we also want a company with better opportunities and fewer risks," said Grolms.
The management of Thyssenkrupp will present a refined strategy to its Supervisory Board in the second week of July. Sources said a sale of its Materials Services unit and could involve further cost reductions.
Edited by Sabine Wollrab, Douglas Busvine, Cynthia Osterman, Larry King