ThyssenKrupp, Tata in Talks on Steel Tie-Up -- 5th Update
April 01 2016 - 2:20PM
Dow Jones News
By Eyk Henning and Alex MacDonald
FRANKFURT -- Engineering conglomerate ThyssenKrupp AG, of
Germany, and India's Tata Steel Ltd. have held talks on combining
their continental European steel operations, as overcapacity
continues to weigh on prices and profits, according to people
familiar with the matter.
The companies have been holding high-level talks for over a
year, the people said, noting Thyssenkrupp's preferred structure
might be a tie-up of the two companies' steel assets in a joint
venture.
It wasn't immediately clear where the talks now stand.
There is also no guarantee a deal will be reached, one of the
people said, adding that an agreement is unlikely in the short
term. If completed, the transaction would help both companies gain
scale and reap synergies.
German daily Rheinische Post reported earlier that the companies
were in advanced talks on combining their steel operations.
Thyssenkrupp's shares soared following the report, rising as much
as 7.7%, in morning trading.
A reduction of its steel exposure would help ThyssenKrupp
sharpen its profile as an engineering company with a highly
profitable elevator business. Such a move would likely please
activist investor Cevian Capital Partners, the company's
second-largest shareholder, with more than 15%. A spokesman for
Cevian declined to comment on Friday.
Tata earlier this week said it would explore the sale of its
entire U.K. business, a move analysts say could pave the way for a
combination of Tata's Dutch assets with Thyssenkrupp's European
steel operations.
Should Tata sell its U.K. operations, its European "exposure
would focus exclusively on Netherlands-based flat-products business
at Ijmuiden. Given Thyssen's interest in pursuing consolidation
solely with another premium flat-steel producer, we believe this
cleaning-up of Tata's portfolio may help free-up the core Dutch
assets for ThyssenKrupp", Jefferies analysts said in a note this
week.
Credit Suisse analysts came to the same conclusion, saying
Tata's planned exit from the U.K. was a prerequisite for any
potential deal with ThyssenKrupp. "This scenario, in turn, could
lead to the creation of a 20 million tons high-quality steel
producer in Europe and the eventual exit of steel for ThyssenKrupp,
with arguably a strong synergy story," they said.
Tata Steel is Europe's second-largest steelmaker by production
capacity, after Luxembourg-based ArcelorMittal SA. The company has
in recent months announced several rounds of layoffs at its U.K.
operations, which include steel mills across Wales and England. The
company said in January that it aimed to reduce its workforce to
14,000 once it completed consultations with unions about the
proposed cuts. It employed 17,000 workers just before it began
eliminating jobs in 2015.
On Friday, Fitch Ratings cut Tata Steel's credit rating by one
notch to BB from BB+, citing rising debt and lower profitability
across all regions, especially the U.K. The ratings firm said it
would consider a further cut should the steelmaker accrue more debt
to close any loss-making operations in the U.K. By the same token,
it may consider raising the steelmaker's rating if Tata uses any
proceeds from its proposed U.K. asset sales to reduce net debt.
Tata's Chief Financial Officer Koushik Chatterjee told the
Financial Times this week that Tata Steel has written down the
value of its U.K. operations to almost zero, adding, "We have taken
about GBP2 billion ($2.87 billion) of impairment. It is not a
valuation exercise, it is a question of reducing an exposure." The
comments were confirmed by a Tata spokesman.
Thyssenkrupp's chief executive, Heinrich Hiesinger, has said in
the past that consolidation in the sector would make sense, but has
also stressed that combining assets was more likely than one
company acquiring another.
Combining Tata's Dutch plant with Thyssenkrupp's operations
could yield EUR1 billion in annual synergies and create roughly
EUR6 billion in shareholder value, Credit Suisse said.
Under Mr. Hiesinger's reign, ThyssenKrupp in 2014 sold a steel
plant in the U.S. after protracted negotiations, but failed to sell
its Brazilian operations.
Activist investor and shareholder Cevian is supportive of Mr.
Hiesinger's turnaround strategy. Cevian started building a stake in
ThyssenKrupp in 2011, sparking rumors that the venerable German
company might split-up.
--Hendrik Varnholto contributed to this article.
Write to Eyk Henning at eyk.henning@wsj.com and Alex MacDonald
at alex.macdonald@wsj.com
(END) Dow Jones Newswires
April 01, 2016 14:05 ET (18:05 GMT)
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