Terming Tata Steel-Thyssenkrupp deal as a 'step in right direction', rating agency Fitch today said the pact will not only reduce the Indian firms's earnings volatility, but also improve its overall business profile.
"Tata Steel's MoU for thyssenkrupp JV is step in right direction. The memorandum of understanding (MoU) with thyssenkrupp AG...to create a 50:50 JV in Europe paves the way for Tata Steel Limited (TSL) to reduce exposure to a structurally weaker business," Fitch Ratings said.
TSL's operations in Europe face weak regional demand, high conversion costs and lack of captive raw-material sources. Fitch said it believes the reduction in direct exposure to this industry will not only reduce earnings volatility, but also improve its overall business profile.
On September 20, Tata Steel announced signing an agreement with German steel giant Thyssenkrup to merge their steel operations in Europe in a 50:50 joint venture company.
Both the groups were in talks for a merger of their European steel businesses for almost over a year.
The proposed JV will be called thyssenkrupp Tata Steel. It will be formed on a non-cash basis, with both shareholders contributing assets and liabilities in order to achieve fair valuation. The JV will be the second-largest European flat steel producer with annual shipments of about 21 million tonnes.
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