Thyssenkrupp, Tata to pool their assets as overcapacity weighs on the sector
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German steel giant Thyssenkrupp AG and India's Tata Steel Ltd. unveiled plans to fuse their steelmaking businesses in Europe -- a move the two have discussed for years amid a glut of steel in the region that has depressed prices.
European steelmakers have battled protracted overcapacity and a wave of cheap imports from countries such as China. In response, the industry has pursued deals, shed thousands of jobs and closed unprofitable plants.
The deal is structured as 50-50 joint venture, in which both companies will pool their European assets into a new company called Thyssenkrupp Tata Steel, based in the Netherlands. It will be Europe's second-largest steelmaker behind ArcelorMittal SA and rank just outside the world's top 10 by production. It will generate annual revenue of EUR15 billion ($18 billion), ship about 21 million tons of flat steel a year and have a workforce of about 48,000 employees at 34 sites.
Thyssenkrupp CEO Heinrich Hiesinger said the deal was aimed at attacking the overcapacity plaguing the European steel business.
"We are giving the European steel activities of Thyssenkrupp and Tata a lasting future," Mr. Hiesinger said. "We are tackling the structural challenges of the European steel industry and creating a strong No. 2."
Steel customers have faced mounting pressure to buy up cheaper Chinese steel on the market, leaving the region's producers with excess production capacity that Mr. Hiesinger said has created a "vicious cycle" and made restructuring the business every three or four years unavoidable.
Despite efforts by Chinese authorities to tamp down excess production, the country's steel output continues to rise, gaining 9% in August from the previous year to a monthly record of 74.6 million metric tons, according to RBC Capital Markets.
While Chinese exports have fallen in recent months as domestic demand rises, the flood of steel has spurred consolidation in Europe, sometimes irking unions. Tata Steel explored selling its U.K. operations at Port Talbot in Wales but eventually reached an agreement with workers to restructure its retirement plan and keep the plant operating until 2021.
U.S. steelmakers have also struggled amid declining steel prices, and President Donald Trump has repeatedly vowed to cut steel imports in the name of national security. But so far no action has been taken as the administration explores the impact of such a move on the economy
For Thyssenkrupp and Tata Steel, the combination of their European steel assets is expected to generate cost savings of between EUR400 million and EUR600 million through streamlined logistics, supply lines and, most importantly, production capacity. They also warned the deal could result in the loss of up to 4,000 jobs, which would be shouldered by both companies in a mix of steelworker and administrative positions.
Investors welcomed the news, with shares in Thyssenkrupp trading 3.5% higher in morning trading and Tata Steel up 1.6%.
The deal represents Thyssenkrupp's latest move to reduce exposure to steel and focus on its capital-goods operations such as elevators, sophisticated car components and submarines. It follows the sale of its Brazilian steel plant, the last of its steel assets in the Americas, earlier this year.
But Mr. Hiesinger denied the move represented a departure from steel.
"It's been said that we want to separate ourselves from steel or get rid of steel -- that's not true," Mr. Hiesinger added.
The companies said they hoped to formally sign the deal in 2018 and complete and start the JV in late 2018, following regulatory approval, including from European Union competition authorities.
The deal also needs the approval of Thyssenkrupp's workers who have a vote on the company's supervisory board and have previously said they strongly oppose a merger in any form.
Mr. Hiesinger said job cuts were inevitable either way. "In the joint venture, we won't have to resort to any measures that we wouldn't have also needed to implement alone," he said. "Quite the opposite."
Germany's IG Metall union said it was expecting thousands of protesters on Friday at Thyssenkrupp's steel mill in Bochum, Germany.
Thyssenkrupp's supervisory board is set to meet on Saturday, according to a person familiar with the matter, to begin negotiations to approve the signing of a preliminary contract with Tata Steel.
Wilhelm Segerath, who represents Thyssenkrupp's workers on the company's supervisory board, said Wednesday he expected negotiations to be difficult but was willing to examine the joint-venture plans.
"We continue to oppose a merger," he said.
--Marc Navarro Gonzalez contributed to this article.
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September 21, 2017 05:15 ET (09:15 GMT)