In a landmark deal, Tata Steel & ThyssenKrupp seal 50:50 JV agreement

Move to lighten Tata Steel's balance sheet; ThyssenKrupp JV to be 50:50 partnership producing high-quality flat steel

Tata Steel has signed a definitive agreement with ThyssenKrupp AG to create a 50:50 joint venture that would be Europe’s second-largest steelmaker after ArcelorMittal.  The deal is being touted as the biggest consolidation in the European steel market since the acquisition of Arcelor by Mittal Steel in 2006 and Corus by Tata Steel in 2007. 

For Tata Steel, the deal valuations are better than what the Street was anticipating, following the underperformance of its Europe business in the past few quarters.

The joint venture, to be named ThyssenKrupp Tata Steel BV, will have a workforce of 48,000 employees across 34 sites, producing about 21 million tonnes of steel a year and generating revenues of around 17 billion euros.

The definitive agreement follows the signing of a memorandum of understanding (MoU) in September 2017. The transaction is subject to merger control clearance in several jurisdictions, and the Tata Steel management is hoping to close it by December 2018, which was the original deadline.

“The joint venture will create a strong pan-European steel company that is structurally robust and competitive. This is a significant milestone for Tata Steel and we remain fully committed to the long-term interest of the joint venture company. We are confident that this company will create value for all stakeholders,” N Chandrasekaran, chairman, Tata Steel, said in a company release. 

A joint press conference will be addressed by Chandrasekaran and Heinrich Hiesinger, CEO of ThyssenKrupp AG, in Brussels on July 2. “We will create a highly competitive European steel player, based on a strong industrial logic and strategic rationale. We will secure jobs and contribute to maintaining value chains in European core industries,” Hiesinger said in a statement.

The JV will result in the deconsolidation of Tata Steel Europe from the Tata Steel group balance sheet and facilitate deleveraging. The Tata Steel management said in the analyst call that 2.5 billion euros (Rs 200 billion) debt would be transferred. 

With this, Tata Steel has turned into an investor from an owner for this entity, in turn, insulating itself from the vagaries of the business cycle, said brokerages. 

“The debt will move out of Tata Steel books at consolidated levels and the balance sheet should only look stronger,” said Giriraj Daga, portfolio manager at Visaria Securities.

The JV will be managed by a holding company located in the Amsterdam region. The future management board will have six members, who will be named at a later date. The management board will be overseen by a supervisory body comprising three representatives from each of the joint venture partners.

The co-determination structures will be retained. The new company will have a European Works Council. In addition, an Employee Executive Committee (EEC) will be established with three employee representatives each from ThyssenKrupp Steel Europe and Tata Steel Europe, which will regularly discuss strategic issues with the management board. Until closing, however, ThyssenKrupp Steel Europe and Tata Steel in Europe will operate as separate companies and as competitors.

ThyssenKrupp had been facing pressure from shareholders Elliott and Cevian to change the valuation of the joint venture since Tata Steel Europe had underperformed compared to ThyssenKrupp since the deal was first announced.

As a compromise, the joint venture will issue warrants equivalent to 10 per cent of equity capital to ThyssenKrupp subject to certain dilution provisions, which can be monetised through a secondary sale in the case of an IPO. With the cut in valuation not as steep as anticipated by the Street, expect some respite for the Tata Steel stock, which has underperformed vis-à-vis domestic peers, such as JSW Steel, Steel Authority of India and Jindal Steel in the past few months.

In the event of an IPO, ThyssenKrupp would receive a higher share of economic rights, reflecting a ratio of 55:45. ThyssenKrupp will have the exclusive rights to decide on the timing of the potential IPO, the company presentation said. 

However, the warrants will be dormant and triggered only in the case of an IPO, Tata Steel told analysts.