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 deal comes after months of negotiations since the announcement of a first agreement in the September. Both companies hope that it will help them to respond to challenges in the volatile steel industry, including overcapacity.
The largest European steel business since the acquisition of Arcelor by Mittal in 2006, the 50-50 joint venture – Thyssenkrupp Tata Steel called – have around 48,000 workers and around 17 billion euros (15.04 billion pounds) in 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.
Completion of the transaction, which has been completed for more than two years, is expected in either the fourth quarter of this year or the first quarter of 2019, subject to cartel discussions with the European Commission, the company said.
The project not only addresses the challenges of the European steel industry, Hiesinger said, but is "the only solution to create a significant added value of around 5 billion euros for Thyssenkrupp and Tata Steel through joint synergies that are not possible
Tata Steel Chairman Natarajan Chandrasekaran said in a separate statement that 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 local markets to absorb more of steel production.
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 pressured by activists Cevian and Elliott to obtain more commitments from Tata Steel, whose European operations were worse than Thyssen since the announcement of the agreement and created 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 reserved the right to decide when an initial public offering could take place. The joint venture aimed to distribute a dividend in the low to mid three-digit million euro range.
The German group also expects annual synergies of 400 million 500 million euros from the transaction. Additional synergies are possible by managing investments and optimizing working capital.
Most synergies will be realized in the first three years of the joint venture, said Thyssenkrupp's CFO Guido Kerkhoff at a investor meeting.
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.
Due to large pension obligations, Port Talbot was an important issue in the early stages of inter-company bargaining before an agreement was reached last year.
Tony Brady, National Officer of Unite, the UK's largest union, said workers "are seeking guarantees of jobs and investment for British Joint Venture operations to secure the future of British steel."
The Dutch unit of Tata Steel will also be part of the joint venture's cash pooling mechanism, meaning that the unit's cash flow will not be restricted. 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.
Additional coverage by Andy Bruce in London; Edited by Sabine Wollrab, Douglas Busvine, Cynthia Osterman, Clelia Oziel