Red hot steel slabs sit stacked in a storage yard at the ThyssenKrupp AG steel plant. (Photographer: Krisztian Bocsi/Bloomberg)

What If Tata Steel-Thyssenkrupp Deal Terms Change

Tata Steel Europe’s weaker operating performance is behind the demand from activist shareholders to change the terms of its proposed joint venture with Thyssenkrupp that would have helped the Indian steelmaker strengthen its balance sheet.

Elliott Capital Management, which bought stake in the German conglomerate Thyssenkrupp in May, wrote to the company urging it to negotiate better joint venture terms with Tata Steel, Bloomberg reported. It said the ideal structure would be Thyssenkrupp getting 82 percent and Tata Steel 18 percent, the report said citing the letter.

The two companies originally agreed to a 50:50 shareholding. Tata Steel was to transfer 2.5-billion euros of debt while Thyssenkrupp was to transfer 4 billion euros of liabilities, including 3.6 billion euros of pension liabilities, to the joint venture.

The deal is important for Tata Steel which is looking to reduce its European exposure. The proposed joint venture would drive cost synergies, allowing Tata Steel to focus on its Indian operations where it has been slow in expanding capacity, CLSA said.

Emailed queries to both Elliott Capital and Tata Steel to inquire about the future of the joint venture remained unanswered. Bloomberg reported yesterday quoting people familiar with the matter that while nothing has been decided yet, one possibility being considered is to increase Thyssenkrupp’s equity stake in the joint venture and keep the voting rights at a 50-50 split.

Also read: Thyssenkrupp Union Raises Alarm Over Tata Steel's Joint Venture

When the deal was announced in September 2017, Tata Steel had lower debt and liabilities compared to its German partner, according to a recent note by CLSA. Tata Steel Europe had then reported trailing 12-month Ebitda of 699 million euros compared to Thyssenkrupp’s 866 million euros. So, Tata Steel Europe’s debt-to-Ebitda was at 3.6 times against Thyssenkrupp’s 4.2 times.

The performance of Indian steelmaker’s European unit has since weakened. In comparison, Thyssenkrupp’s Ebitda has improved.

Elliott’s main contention is that Tata Steel’s weak financial performance makes an equal tie-up less favourable for Thyssenkrupp. The fund indicated that based on the current financials of both the companies, the deal translates into a 1.9-billion-euro shortfall for Thyssenkrupp going by the original terms of the deal.

Thyssenkrupp’s second-largest shareholder Cevian Capital also shares similar views, Bloomberg reported quoting unnamed people. It believes Thyssenkrupp should be compensated with up to 2.5 billion euros if the joint venture goes through.

Also read: Cevian Is Said to Push for Thyssenkrupp Breakup Over Tata Deal

At the time of signing of the deal, the stake of both the partners was valued at 2.8 billion euros. If renegotiated at Elliott’s suggestion giving Thyssenkrupp 82 percent, Tata Steel’s equity valuations will drop from 1.45 billion euros to close to little over 500 million euros, according to BloombergQuint calculations. If Tata Steel agrees to a 40 percent stake, then its equity value would be 1.15 billion euros.

Thyssenkrupp has so far sounded confident that the joint venture will proceed as per the initial plan. The company’s management, in an interaction with Edelweiss Securities, reiterated strategic and operational synergies at 400‐600 million euros with planned reduction of up to 4,000 jobs. At this stage, brokerage quoted the company as saying, no stakeholder—including workers’ union—can change the deal contours.