Crack in the welding: Tata Steel Europe, ThyssenKrupp JV hits speed bump

German firm's investors want better deal for merger

A lifeline joint venture deal for Tata Steel Europe with German giant ThyssenKrupp is headed for trouble with key shareholders asking the ThyssenKrupp management to re-negotiate a better deal as profits of the German company have improved while those of Tata Steel Europe have slowed since last September, when both companies first proposed a merger of their European businesses.

In a communication to Thyssenkrupp AG’s management, Elliott Capital Management, which owns a 3 per cent stake in the company, highlighted the divergence in performance of the steel businesses of Tata Steel Europe and Thyssenkrupp. The weakness in Tata’s slowing performance meant that a tie-up was now less favourable for Thyssenkrupp, it said. Earlier a similar appeal was made by Cevian Capital, which owns a 15 per cent stake in Thyssenkrupp, according to people familiar with the matter.

Since Thyssenkrupp and the Tatas agreed to the preliminary terms of a merger of their European steel operations last September, Tata Steel Europe’s business has been under pressure. Earnings at Tata Steel Europe 

have dropped on rising raw material costs, while Thyssenkrupp’s profits have risen. There will also be 4,000 job losses, which the unions are opposing.

If the initial deal terms of the 50:50 joint venture were to be maintained, it would represent about a $2.2-billion lower valuation for Thyssenkrupp, Elliott said. The equity structure would have to be 82 per cent in favour of Thyssenkrupp, the letter added.

The investors’ views could make it more difficult for Thyssenkrupp CEO Heinrich Hiesinger, who has pledged his future on the deal with the Tatas, to proceed under the current terms. Hiesinger still needs to convince the company’s supervisory board to sign off on the joint venture.

As the board consists equally of shareholder and labour representatives, Hiesinger needs to convince both camps to agree to the deal. For Tata Steel Europe, which has been an albatross in Tata Steel’s growth story, this means the Tatas will have to either sweeten the deal or look for other options.

“This significant divergence in relative valuation should be adequately reflected in the final terms of the steel JV,” Elliott wrote in the letter, which was first reported by German newspaper Frankfurter Allgemeine Zeitung.

Earlier, Cevian Capital, Thyssenkrupp’s second-largest shareholder, had said Thyssenkrupp should be compensated with up to 2.5 billion euros if the joint venture came to fruition. Elliott and Cevian declined to comment when contacted by Bloomberg News. A formal agreement between ThyssenKrupp and Tata Steel is pending.

In India, Tata Steel shares closed 2 per cent down on Monday at Rs 588 a share as investors were nervous over the future of Tata Steel Europe, which had affected the parent company negatively since Tata Steel’s acquisition in 2007 at $13 billion.

When contacted, a Tata Steel spokesperson said: “As outlined in the MoU, both companies will bring different assets and obligations into the JV in order to set the valuation ratio at 50:50.”   

Thyssenkrupp reiterated that it planned to sign the agreement, declining to comment further.

In a meeting with analysts on May 16, Tata Steel said its joint venture with Thyssenkrupp was on track. 

“We are progressing well to form the joint venture in Europe and we expect to sign the binding agreement very soon. Assuming six months for approval from the anti-trust authorities, we are looking to close the transaction by the end of the year,” T V Narendran, Tata Steel’s global CEO and MD, had said. The company is planning to de-consolidate Rs 200 billion of debt to the joint venture.

Earlier, Thyssenkrupp’s labour representatives had also voiced their concern over the deal with Tata Steel Europe, highlighting the drop in profits at Tata’s European business and rising earnings at Thyssenkrupp’s business.

“We are still concerned that the JV is a sensible solution, given the circumstances,” said Wilhelm Segerath, who is a senior official at labour union IG Metall and sits on Thyssenkrupp’s supervisory board. “The diverging development at both companies emphasises our concerns about the viability of Tata’s European operations, specifically the UK plant.”

The diverging performance between the two businesses would affect the outcome of the joint venture. The 50-50 split between Tata and Thyssenkrupp is based on both companies’ earnings before interest, tax, depreciation and amortisation of the 12 months prior to last June.

Another sticky point of the deal is a plan to give Tata’s Dutch plant certain operational privileges after the merger, according to people familiar with the matter. The special rights would allow the management at Tata’s Ijmuiden plant in the Netherlands to retain cash flow and keep the current set-up of operations after the joint venture is completed, according to documents seen by Bloomberg.

If Tata’s Dutch plant were to be protected, then Thyssenkrupp’s activities should get the same guarantees, Segerath had said.

Europe workers question rationale 

Tata Steel’s European labour representatives remain unconvinced by a planned joint venture (JV) with Thyssenkrupp, adding there are numerous details that need to be hammered out before they can endorse a deal.The remarks on Monday by Tata Steel Europe’s European Works Council (EWC) threaten a further delay to a deal to combine Thyssenkrupp’s steel operations with Tata’s European steel business, a pact which has not been signed because of resistance from Dutch workers.

Thyssenkrupp said in May it expected to be able to sign the deal with Tata Steel, agreed in principle last September, in the first half of 2018. Tata Steel confirmed that timeline at the time. The planned transaction would combine Thyssenkrupp’s and Tata Steel’s European steel operations to create the continent’s second-largest steelmaker after ArcelorMittal with sales of 15 billion euros ($17.7 billion).

A Tata Steel spokesman told Reuters: “We will continue to engage in constructive dialogue with our employee representatives throughout the process of creating the proposed joint venture.”

London/Reuters