Tata Steel Ltd.’s board approved a joint venture with Germany’s Thyssenkrupp A.G. to combine their European steel businesses to create the continent’s second-largest steelmaker after ArcelorMittal.
The board of Tata Steel approved to create a 50:50 joint venture and has adopted resolutions for the signing the definitive agreement, the company said in its exchange filing. Thyssenkrupp workers’ union had given their consent to the deal, on Friday.
The partners will have to hold a combined stake of at least 50 percent for at least six years, Tata Steel said in a conference call with analysts. At the time of the initial public offering upon conversion of warrants, Thyssenkrupp’s stake can increase to 55 percent. The company expects regulatory approvals by the end of the year, but said the process could take some more time.
That comes after the German steelmaker came under pressure from some of its investors like Elliott Management Corp. and Cevian which argued that the terms needed to be improved after a long slump in Tata’s European steel profits.
Thyssenkrupp tried to allay the concerns. Since signing memorandum of understanding, the different performance development of Thyssenkrupp Steel Europe and Tata Steel Europe has led to a valuation gap between the two entities, it said in a statement on its website. The definitive agreement includes a proper compensation of this valuation gap, it said.
- In case of an initial public offering of the joint venture, Thyssenkrupp will receive a higher share of the proceeds, reflecting an economic ratio of 55:45 in its favour.
- Thyssenkrupp has the right to exclusively decide on the timing for a potential IPO.
“The joint venture not only addresses the challenges of the European steel industry. It is the only solution to create significant additional value of around 5 billion euros for both Thyssenkrupp and Tata Steel due to joint synergies which cannot be realized in a stand-alone scenario,” Heinrich Hiesinger, chief executive officer of Thyssenkrupp AG, said in the statement. “For both partners the stake in the joint venture means a significant lift up of value.”
- Tata Steel will transfer external debt of 2.5 billion euros.
- Pro-forma Ebidta is of 2 billion euros per annum with identified synergies
- At time of IPO, the joint venture will issue warrants equivalent to 10 percent of the equity capital to Thyssenkrupp
- This will be subject to certain dilution provisions and can be monetised through secondary sale in case of IPO.
- Identified synergies of 400-500 million euros a year, along with synergies in capex and working capital.
The two companies will jointly invest in Tata Steel’s Port Talbot facility, extending the life of one of the blast furnaces located in the plant, according to Bloomberg.
Job Cuts Expected
Thyssenkrupp, in its statement, said leveraging cost synergies will over the years ahead require up to 4,000 job cuts in operations and support functions that is expected to be shared roughly evenly between the two parties.
Both the companies had in announced plans to combine their European operations and form an equal joint venture in September last year. The new company plans to produce 35,000 million tonnes per annum of CRGO electrical steel used in transformers for power sector from the expanded factory against the current capacity of 10,000 MT.