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Germany’s ThyssenKrupp and India’s Tata Steel have agreed to merge their European operations to create the continent’s number two steel producer after ArcelorMittal.
After more than a year of talks, the two companies announced a memorandum of understanding on Wednesday morning, just weeks after Tata cleared a key obstacle by agreeing with UK regulators to hive off a pension scheme for its British business.
The agreement calls for a 50-50 joint venture that would produce annual synergies of up to €600m partly through up to 4,000 job losses. The group, to be named “ThyssenKrupp Tata Steel”, will be managed via a lean holding company in the Netherlands — home to Tata’s Ijmuiden plant, regarded as one of the most efficient in Europe and long coveted by ThyssenKrupp.
The Dutch site is located about 200km from ThyssenKrupp’s German steelmaking plant at Duisburg, which could serve to generate cost-savings through joint working.
The two groups said that they expect to sign a formal merger at the start of 2018 for completion by the end of next year, pending regulatory approvals, after a period of due diligence to examine each other’s books.
The new combined company would generate pro forma sales of €15bn, employ about 48,000 people at 34 locations and ship 21m tonnes of steel per year. Up to 2,000 jobs in administration and 2,000 in production are to be cut, shared evenly by both groups.
The groups said the production network would be reviewed in 2020 “with the aim of integrating and optimising the production strategy”.
Heinrich Hiesinger, ThyssenKrupp chief executive, said the merger would offer both companies a sustainable future and tackle the structural challenges facing a European steel sector suffering from overcapacity.
“We will not be putting any measures into effect in the joint venture that we would not have had to adopt on our own,” Mr Hiesinger said. “On the contrary, by combining our steel activities, the burdens for each partner are lower than they would have been on a standalone basis.”
The steelmaking industry has been in disarray following a collapse in steel prices under a supply glut driven by a torrent of cheap Chinese exports.
According to UBS, profitability per tonne among Europe’s steelmakers plunged from a peak of €215 in earnings before interest, tax, depreciation and amortisation in the third quarter of 2008, to €46/tonne in the first quarter of 2016. Earlier this year profitability was around €83/tonne.
For ThyssenKrupp the deal is an opportunity to separate the volatile steel producing business from its more lucrative capital goods business, which includes making elevators, submarines and car parts.
For Tata, the announcement ends the uncertainty around its UK business stirred up in March last year, when the company said it would look to dispose of the business after a string of heavy losses. That decision was taken under Cyrus Mistry, who was sacked as chairman of group holding company Tata Sons in October.
His successor Natarajan Chandrasekaran said on Wednesday that Tata Sons would now look to support Tata Steel’s expansion in its home market of India.
Koushik Chatterjee, Tata Steel’s executive director, said the tie-up would enable a “significant deleveraging” of Tata Steel’s balance sheet.
Analysts have been supportive of a deal. At Berenberg in London, Alessandro Abate said if ThyssenKrupp can pull off the merger and become a pure industrial goods maker, it would mark “one of the most complex corporate turnrounds in the history of the EU steel sector”.
For Tata, Mr Abate added, it would be a “glorious exit from likely the most painful M&A deal in the EU steel history,” a reference to its 2007 purchase of Corus — an ill-timed £6.7bn deal that propelled Tata from the world’s 56th largest steelmaker to the number six spot.