Thyssenkrupp, Tata in Talks on Steel Tie-Up -- 5th Update
April 02 2016 - 9:26AM
Dow Jones News
By Eyk Henning and Alex MacDonald
FRANKFURT--German engineering conglomerate Thyssenkrupp AG and
India's Tata Steel Ltd. have held talks on combining their
continental European steel operations, as global overcapacity
weighs 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, adding that 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, though
one of the people said an agreement is unlikely in the short term.
If completed, the transaction would help both companies achieve
scale and cost savings.
Thyssenkrupp shares rose as much as 7.7% in morning trading
Friday after German daily Rheinische Post reported the companies
were in advanced talks about a combination. The stock ended the day
up 4.9%.
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 a stake of more than 15%. A
spokesman for Cevian declined to comment on Friday.
Tata Steel 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 its Dutch assets with Thyssenkrupp's European
steel operations.
Should Tata Steel sell its U.K. operations, its European
exposure would focus on a Netherlands-based flat-products business,
Jefferies analysts noted this week. "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," they said.
Credit Suisse analysts came to the same conclusion, saying a
Tata Steel exit from the U.K. would be a prerequisite for any 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. It
said in January that it aimed to reduce its workforce to 14,000
after consulting with unions about the proposed cuts.
The company employed 17,000 workers just before it began
eliminating jobs in 2015.
China has been swamping global markets with low-priced steel,
intensifying pressure on Western rivals already reeling from
overcapacity. Steel imports from China, the world's largest steel
producer, to the European Union have more than doubled over the
past two years.
On Friday, Fitch Ratings cut Tata Steel's credit rating, 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 operations in
the U.K. By the same token, Fitch said it might consider upgrading
the steelmaker if proceeds from U.K. asset sales were to go toward
reducing debt.
Tata Steel finance chief Koushik Chatterjee told the Financial
Times this week that the company had taken a charge of about GBP2
billion ($2.87 billion) in writing down the value of its U.K.
operations to almost zero. The comments was confirmed by a Tata
spokesman.
Thyssenkrupp's chief executive, Heinrich Hiesinger, has said in
the past that consolidation in the sector would make sense, while
stressing that combining assets was more likely than one company
acquiring another.
Combining Tata Steel's Dutch plant with Thyssenkrupp's
operations could yield EUR1 billion in annual synergies, Credit
Suisse said, noting that the plant would be a good fit with the
German company's massive facility in Duisburg, Germany.
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 Cevian is supportive of Mr. Hiesinger's
turnaround strategy. The investment firm started building a stake
in Thyssenkrupp in 2013, sparking rumors that the 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
Corrections & Amplifications
Cevian started building a stake in Thyssenkrupp in 2013. An
earlier version of this article incorrectly said it started
building a stake in the company in 2011. (April 2)
(END) Dow Jones Newswires
April 02, 2016 09:11 ET (13:11 GMT)
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