ThyssenKrupp keen on merger but Tata deal may take time


Posted July 12, 2016 by MnACritique

ThyssenKrupp AG of Germany has said consolidation of the steel industry in Europe is the only way forward in the light of the current economic environment in the Continent.
 
KOLKATA | MUMBAI: ThyssenKrupp AG of Germany has said consolidation of the steel industry in Europe is the only way forward in the light of the current economic environment in the Continent.

As the only profitable steel business in Europe, the German steel major is widely predicted to take a leading role in proposed merger talks with rivals, including Tata Steel. However, analysts feel while there are gains for the buyer, talks may take a while to fructify and the outcome remains uncertain.

"We believe a consolidation of the European steel industry is necessary, and we have outlined that in this situation everyone is talking to one another in the industry. Among others, we also are in talks with Tata Steel," Nicola Roettger, spokesperson for ThyssenKrupp said.

"The entire steel industry in Europe is currently struggling to safeguard the future of its business. Just a few steelmakers in Europe are profitable in the current environment - our steel business is one of these few companies," the statement added.

Analysts said the talks may take awhile given the nature of the deliberations and the industry's current situation. "JV discussions are still the preliminary stages and might take time to fructify.

It is also uncertain whether Tata will be able to find a potential partner interested in taking on exposure to a UK steel asset, CLSA said while ICICI Securities said, "a quick outcome is not what we expect."

ThyssenKrupp too indicated similar concerns saying, 'it still remains open whether and if, when and with whom such a step in consolidating the industry would take place.' "Brexit has clearly whipped up virulent uncertainty in the financial and commodities markets, and it is not totally certain how it could affect talks, Colin Richardson, Steel Analyst, S&P Global Platts said.

However, he pointed out potential benefits for a buyer saying, "In the event ofBrexit taking place, there could be an imposition of import tariffs on European material into the UK, giving whomever owns Port Talbot and the other assets a more captive market with less import penetration. Secondly, some of the downstream rolling lines in the UK are very valuable."

Industry watchers point out Tata Steel is likely to have less bargaining power in potential merger talks, especially in light of the Brexit vote though its profitable business in the Netherlands, including Ijmuiden plant, will be a strength.

Significantly, ThyssenKrupp which has through a series of restructuring and divestments in recent past built up a profitable steel business is also grappling with cheap imports from China and pressure on prices within Europe's struggling steel industry.

According to a CLSA report released on Monday said Tata Steel's plan to partially divest its UK assets into a JV versus an outright sale, would be seen as an incremental negative for the stock since it would only reduce Tata's exposure to its low-margin UK business, not eliminate it completely. "The contours of any such deal in terms of the equity stake and offloading of debt to the JV are crucial.


Any success in forming a JV with a large European steel player could help in consolidating the European steel industry," it added. In its latest report, ICICI Securities said the Tata Steel UK bid outcomes were expected to fail to meet management expectations.

"Given that Tata Steel had to pump in close to GBP 1.3 billion as working capital support from FY12-FY16 to support Tata Steel UK, finding a buyer was always a tricky task without UK government support," it said. Tata Steel also hopes a reduction of the British Steel Pension Scheme liabilities through legislation is a possible outcome.
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Issued By M&A Critique
Country India
Categories Business , Engineering , Manufacturing
Tags merger , tata steel , thyssenkrupp
Last Updated July 12, 2016