ThyssenKrupp deal new start for Tata Steel

Some gains already factored in but further re-rating likely

What started as a mega acquisition by an Indian company to attain global scale ranking as the world’s fifth largest steel maker has ended in a joint venture (JV) that will be the second largest in Europe.
 
Tata Steel’s acquisition of the Corus group in 2007 for £6.7 billion in enterprise value soon faced headwinds, following the global crises forcing it to cut costs, sell loss-making units, infuse capital and enhance profitability. Ten years later, after much restructuring and effort, Tata Steel is making a new start, with signing of a memorandum of understanding (MoU) for a JV between Tata Steel Europe (TSE) and ThyssenKrupp AG of Germany.
 

While this deal was anticipated after Tata Steel settled pension liabilities in the UK, a major stumbling block, the move is positive. As finer details on valuations, etc, are to be finalised, combining of the two businesses would be through a non-cash transaction framework, based on fair valuation. Both would contribute to debt and liabilities, to achieve equal shareholding.
 
Among the gains, the debt reduction directly would not be much at $2.7-2.8 billion of the $7.7 billion debt for the European operations. However, the JV will provide significant cash flow for balance debt servicing and supporting further debt reduction in the medium term, says Abhisar Jain at Centrum Broking.
 
With continued restructuring and improving steel prices, TSE has already boosted per-tonne profitability to $100, from losses earlier. A JV with a speciality steel player would improve prospects further (estimates peg boost of $30-40 per-tonne). The threat from cheap import and over-capacity can pose risk but the combined entity, with cost savings and higher pricing power, will be better off. It will be second largest in Europe, with 21.3 million tonnes (mt) annual capacity (9.8 mt of TSE and 11.3 mt of ThyssenKrupp). Overall, the company expects synergy benefits of ^400-600 million per annum accruing to the JV from commercial and administrative integration, logistics, R&D and improved capacity utilisation. However, these will accrue over time and be back-ended. Once the deal is through, Tata Steel can concentrate on its more profitable and high-growth domestic operations. Tata Steel’s standalone steel volume increased 28 per cent year-on-year in the June quarter, despite disruption led by goods and services tax-related destocking. Operating profit jumped a third.
 
With all these positives, further valuation re-rating after the event is likely. The stock closed 1.5 per cent up at Rs 686.70 on Wednesday and was the second largest gainer among Sensex companies.