Why Thyssenkrupp’s ‘Plan B’ May Be A Setback For Tata Steel

Thyssenkrupp AG and Tata Steel Ltd. don’t expect their planned joint venture to go ahead due to the European Commission’s continuing concerns, the German company said in a statement.

"From the point of the view of Thyssenkrupp and Tata Steel, further commitments or improvements would adversely affect the intended synergies of the merger to such an extent that the economic logic of the joint venture would no longer be valid," the statement said.

Thyssenkrupp also said that it plans an initial public offering of its elevator unit and will abandon its original plan to split the company in two. The split, announced in September 2018, would have divided the company into Thyssenkrupp Industrials, comprised of elevator, automotive supplies and plant construction businesses, and Thyssenkrupp Materials, which would run steel and metal-focused operations.

What Does It Mean For Tata Steel?

Thyssenkrupp’s U-turn raises questions over the €400-500 million in synergy that the Indian steelmaker was expected to realise from the joint venture.

The Tata-Thyssenkrupp deal—in which Thyssenkrupp’s European steel business was to merge with Tata Steel—was signed in 2017 and was awaiting clarity from European Commission. A final outcome is expected by June 17. As per the terms of the deal, Tata Steel was to transfer €2.5 billion of debt to the joint venture while Thyssenkrupp was to transfer €4 billion of liabilities to it.

The deal was important for Tata Steel, which has been looking to reduce its European exposure. It was expected to allow the steelmaker to focus on India, where it has been slow to expand capacity.

Phillip Capital estimates an impact of over Rs 25 per share if the company fails to form a joint venture with Thyssenkrupp. Motilal Oswal said the joint venture’s failure won’t have a major economic impact on Tata Steel but didn’t rule out the chances of de-rating.

Tata Steel Puts Up A Brave Face

Tata Steel, while pointing at European Commission’s lack of intention to clear the deal, said that it would continue to focus on its performance management to enhance its earnings and cash flows.

The management, in a conference call, gave more details. Here are the important takeaways:

• To look at monetising other assets to trim debt
• To de-leverage also through enhancing internal cash flows
• To continue to operate European plants despite soft market conditions
• European division to have better operational year as compared to previous
• Stable operations in U.K. and Netherlands to aid European division growth this year
• Volume to grow 5 percent higher for the European division
• Blended borrowing cost of the company to remain at similar levels