Tata Steel eyes stake in Thyssen's Europe steel unit

According to a German business paper, spokesman for Thyssenkrupp said that a consolidation in the steel sector made sense

Tata Steel is planning to take a stake in Thyssenkrupp’s European steel unit, German business paper Rheinische Post reported on Friday, sending shares of the German steelmaker higher. The paper said talks were at an advanced stage, citing government sources in Berlin.

Tata Steel, second largest steel producer in Europe, put its loss-making British operations for sale this week. That decision has raised expectation 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 eight per cent to a four-month high at Euro 19.75 but pared gains somewhat after a person familiar with the situation said the Thyssen’s supervisory board had not yet discussed a possible tie-up.

Two sources with knowledge of the matter said all of Europe’s steel producers were talking to one another but nothing concrete was yet in sight.

Thyssen declined to comment, while a European spokesperson 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 as 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 two to three per cent savings on raw materials, among others.

This could boost their combined earnings before interest, tax, depreciation and amortisation (Ebitda) by Euro 400-500 million ($456-570 million), they said.

Earlier this week, Tata Steel put its British business up for sale, sparking calls for the British government to intervene and safeguard thousands of jobs in the crisis-hit industry.

Tata said in a statement that trading had “rapidly deteriorated” in Britain and Europe, adding it will “explore all options for portfolio restructuring including the potential divestment of Tata Steel UK, in whole or in parts”.

Amid fears that 15,000 jobs may be lost, the UK on Friday said it will appoint independent advisors once the sale of Tata Steel’s UK business commences and, along with the Wales government, help in securing a buyer for the country’s largest steelmaker.