German steel maker ThyssenKrupp and Tata Steel have agreed to form an equal joint venture that would create Europe’s second-largest steel firm, after ArcelorMittal. Tata Steel has said it would shift € 2.5 billion of its debt to the new entity. ThyssenKrupp would also be shifting its liabilities worth € 3.6 billion that it had gathered from its pension schemes.
“Tata Steel India is in a strong position to grow faster and set to double its capacity through organic or inorganic route, post deal with ThyssenKrupp,” Tata group Chairman N Chandrasekaran said in a press conference.
The new entity — ThyssenKrupp Tata Steel — would be headquartered in Amsterdam, the Netherlands. The entity would have 21.3-million-tonne capacity, sales of about €15 billion and a workforce of about 48,000 at 34 locations. The merger is, however, likely to lead to 4,000 people losing their jobs both on the production side and administration side.
Koushik Chatterjee, Tata group executive director, has said the partners expect the deal to close by December this year or early next year.
Chatterjee said, “Fundamentally, we can look at the € 2.5 billion as structural deconsolidation, or as deleveraging, once the joint venture is done in about a year.”
The merged company expects to cut costs by € 400-600 million a year, mainly by slashing back-office expenses, optimising distribution and squeezing suppliers. Moreover, the very reason why Tata Steel is looking at a more sustainable capital structure is to ensure that the rating of this company will be robust, said Chatterjee.
The merger has been in the pipeline for almost two and half years now. The likelihood of job cuts has been a bone of contention for the employee unions of both the companies. Tata Steel has said they were in discussions with all the stakeholders, including the unions, to resolve the matter. “We have a very robust and ongoing conversation with the unions at all the levels, and it is important for all of us to ensure that we move together because it is just not about doing a deal. We are creating a new structure, a new institution. Therefore, we will have to work together to take along everybody,” said Chatterjee.
Anjani Kumar Agarwal, partner and national leader, metals and mining, EY, said, “Consolidation in the steel industry augurs well for the business, as the industry is relatively fragmented compared to its global suppliers of iron ore, coking coal as well as customers. For example, in the value-added innovation-led product segments, customers are truly global OEMs (original equipment manufacturers).”
According to Agarwal, the trend of regional consolidation was quite profound. It included four large combinations in China as well as Arcelor Mittal acquiring ILVA, Italy’s largest producer. “The combined business, when well integrated, will emerge stronger, riding on R&D, advanced technologies, integrated supply chains, differentiated products, complementary markets and customers,” he said.
On backward integration, which is a form of vertical integration that involves the purchase of, or merger with, suppliers up the supply chain, Chatterjee said both Tata Steel Europe and ThyssenKrupp buy their iron ore and coal from the market. So, the merged entity would follow the same route and buy 32 million tonne of iron ore and 18 million tonne of coking coal. The Ebitda of the entity is likely to be € 1.5 billion. Read more
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