FRANKFURT (Reuters) - India's Tata Steel is planning to take a stake in Thyssenkrupp's European steel unit, German business paper Rheinische Post reported on Friday, sending shares in the German steelmaker higher.
The paper said talks were at an advanced stage, citing government sources in Berlin.
Tata Steel, the second largest steel producer in Europe, put its loss-making British operations up for sale this week. That decision has raised expectations of a long-awaited consolidation of Europe's battered steel sector, which is suffering from years of unaddressed overcapacity.
Thyssen's Steel Europe unit is profitable and a Tata-Thyssen combination excluding the UK is seen as most likely.
Shares in Thyssen jumped as much as 8 percent to a four-month high at 19.75 euros but pared gains somewhat after a person familiar with the situation told Reuters that Thyssen's supervisory board had not yet discussed a possible tie-up.
Two sources with knowledge of the matter said that all of Europe's steel producers were talking to one another but that nothing concrete was yet in sight.
Thyssen declined to comment, while a European spokesman for Tata Steel declined to comment.
Rheinische Post said Tata and Thyssen were discussing several scenarios, the most likely being a joint venture with Tata Steel holding an option to increase the stake later.
Analysts at Berenberg said it would make more sense for both Tata Steel and Steel Europe to sell shares in an initial public offering (IPO) of such a joint entity because that was more likely to translate into significant financial returns for the parent companies.
"For Tata Steel, in particular, an IPO would partly reward the company after the massive writedown of the UK assets' book value," they said in a note to clients.
A combination of the two businesses would lead to greater pricing power and 2 to 3 percent savings on raw materials, among others, which could boost their combined earnings before interest, tax, depreciation and amortisation (EBITDA) by 400 million to 500 million euros ($456-570 million), they said.
($1 = 0.8769 euros)
(Reporting by Christoph Steitz and Matthias Inverardi; Writing by Maria Sheahan; Editing by Christian Schmollinger and Susan Fenton)