Tata Steel and German steelmaker Thyssenkrupp AG have signed a memorandum of understanding (MoU) to create a joint venture, Thyssenkrupp Tata Steel, by combining the flat steel operations of the two companies in Europe and the steel mill services of Thyssenkrupp group.
The proposed 50:50 joint venture would have a turnover of about €15 billion (Rs115,000 crore) and currently employs about 48,000 people spread across various locations. The JV will be based in Amsterdam.
The merger will create the region's second-largest producer and tackle overcapacity in the industry.
The JV will be formed through non-cash transaction, based on the valuation where both shareholders would contribute debt and liabilities to achieve an equal shareholding in the venture
"Thyssenkrupp Tata Steel would have robust capital structure that is well matched by underlying free cash flows of the company. It would benefit from the scale and distribution network capability of the combined assets, achieve quality, technology and cost leadership in the European steel industry.
The two companies said they intent to remain as long-term partners and continue the present network configuration of all the upstream hubs in the proposed joint venture.
"The Tata Group and Thyssenkrupp have a strong heritage in the global steel industry and share similar culture and values. This partnership is a momentous occasion for both partners, who will focus on building a strong European steel enterprise. The strategic logic of the proposed joint venture in Europe is base on very strong fundamentals and I am confident that Thyssenkrupp Tata Steel will have a great future," Tata Group chairman N Chandrasekharan said.
"Thyssenkrupp and Tata Steel are creating a sustainable future for their respective European steel activities by jointly forming the planned joint venture. This business combination creates a strong number 2 and is thus much better positioned to cope with the structural challenges in the European steel industry. With Tata Steel, we have found a partner with a very good strategic and cultural fit. Beyond a clear performance orientation, we also share the same philosophy of corporate responsibility towards employees and society," added Heinrich Hiesinger, chairman of Thyssenkrupp's executive board.
The two foresee annual synergies of 400 million €($480 million) to €600 million, helped by savings on areas including capacity utilisation, sales and administration and research and development. The companies flagged the possible loss of as many as 4,000 jobs, from a newly combined workforce of about 48,000.
Thyssenkrupp and Tata have been in tie-up talks for more than a year to drive the latest wave of consolidation as steelmakers seek ways to counter overcapacity and cut costs.
While steel prices have recovered since early last year, the industry still faces a global glut caused by large Chinese exports and too much capacity around the world. Benchmark prices in Europe are about half the level they were in 2008, according to reports.