India's Tata Steel and German major Thyssenkrupp AG have signed a memorandum of understanding (MoU) on Wednesday to build Europe's ssecond largest steel enterprises, Tata Steel said in a filing in Bombay Stock Exchange (BSE).
Natarajan Chandrasekaran, chairman of Tata said: "The Tata Group and Thyssenkrupp have a strong heritage in the global steel industry and share similar culture and values".
Chief Executive Heinrich Hiesinger says a joint venture is the best way to take overcapacity out of the volatile steel market, and said he has no plan B despite reported calls from various investors, including activist firm Cevian, to consider a break-up instead.
"We believe Thyssenkrupp's medium-term goal is to completely spin-out steel ops, leaving Thyssenkrupp as a near pure-play capital goods business, and today's proposed merger structure is attractively "IPO-able", in our view", Jefferies analyst Seth Rosenfeld said in a note, reiterating his "buy" rating.
"The goal is to create a leading European flat steel player with a special focus on quality and technology leadership as well as a sustainably competitive cost base", Germany's Thyssenkrupp said.
Thyssenkrupp had last week said that it could reach a deal this month outlining the annual synergies of 400-600 million euros and around 4,000 job cuts.
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The latest step is a merger of Thyssenkrupp's European steel operations with those of Tata Steel Ltd., one of the larger Mumbai-listed entities controlled by India's Tata family, into a joint venture.
The UK government and unions said they welcomed the merger so long as commitments made past year by Tata Steel UK to safeguard jobs and extend blast furnace operations at Britain's largest steelworks in Port Talbot, Wales, were maintained.
Under the agreement, both companies will have equal representation in management and supervisory boards, Thyssenkrupp said.
Roy Rickhuss, chair of the steel coordinating committee representing UK unions Unite, GMB and Community, said the unions recognised the industrial logic of the deal, but would still press Tata to confirm it will invest in the Port Talbot steelworks, a vital regional employer.
Slaughters is advising longstanding client Tata Steel on the deal, with a team led by M&A partners Robin Ogle and Padraig Cronin, and finance partner Andrew McClean.
Shares in Tata Steel were up 0.7 per cent. "We are tackling the structural challenges of the European steel industry and creating a strong No 2".
The new company will seek to improve capacity utilisation across its three hubs - Ijmuiden in the Netherlands, Duisburg in Germany and Port Talbot in the United Kingdom, not forgetting their related downstream facilities. The companies flagged the possible loss of as many as 4,000 jobs, from a newly combined workforce of about 48,000.
"As a priority, we will be pressing Tata to demonstrate their long term commitment to steel making in the United Kingdom by confirming they will invest in the reline of Port Talbot's Blast Furnace No.5".
The combination is subject to execution of the final agreements and obtaining all corporate authorisations, including Board and Tata Steel shareholder approvals.