Mind the gap - Thyssenkrupp in value struggle with Tata Steel

By Christoph Steitz, Tom Käckenhoff and Arno Schuetze

FRANKFURT/DUESSELDORF (Reuters) - Germany's Thyssenkrupp and India's Tata Steel are struggling to get the planned merger of their European steel operations on track due to diverging values of their businesses, people familiar with the matter said.

Since the two struck an initial deal in September, Thyssenkrupp's businesses have performed better than Tata Steel's, requiring both firms to reassess what their operations are worth and potentially rethink the deal, four sources said.

The so-called valuation gap could be anywhere between 500 million and 3 billion euros ($3.5 billion), one source said.

However, another source told Reuters that it might be smaller than this as valuations were based on the future, not past, performance of the businesses being combined.

Options now include adjusting the amount of debt both groups will transfer to the venture or Tata Steel making a cash payment to Thyssenkrupp to settle the difference or changing the 50-50 ownership of the planned entity, the sources said.

Of these, the third option was the least likely scenario, although a solution could involve more than one option.

"Changing this structure is not on the table," one of the people said.

Although Thyssenkrupp's supervisory board was scheduled to meet on Wednesday to discuss the joint venture, it was not expected to make a decision, the people said.

A Thyssenkrupp spokesman said after the board meeting that the company was sticking to its communicated timeframe for the joint venture and aimed to make a decision in June.

Tata Steel declined to comment.

UNDER PRESSURE

Thyssenkrupp has come under investor pressures to seek better terms following a divergence of the operating performance of both entities since the joint venture, which will create Europe's No.2 steelmaker, was first announced.

Talks have already gone on for more than two years and the fact that there is still no final deal - now scheduled for the end of June - has caused concern among key shareholders, including activists Cevian and Elliott.

The initial memorandum of understanding foresees a 50-50 ownership split, with Thyssenkrupp's steel business accounting for a bigger share of the combined profit. To address this, Thyssenkrupp will transfer about 4 billion euros of debt, more than Tata Steel's 2.5 billion.

Changing the ownership structure is Thyssenkrupp's least preferred option as it would prevent it from deconsolidating its steel business, the sources said.

It would also raise the question over an agreed equal representation on the joint venture's management and supervisory boards, seen as key by labour unions.

Alternatively, Thyssenkrupp could transfer more liabilities than previously planned and Tata Steel might lower its debt contribution - or simply compensate its German partner in cash.

"In defining the debt level you have to make sure that the new company is viable," one of the people said.

($1 = 0.8492 euros)

(Additional reporting by Euan Rocha in Mumbai and Maytaal Angel in London; Editing by Edward Taylor and Alexander Smith)