Tata Steel and Germany’s Thyssenkrupp said on Friday they have given up hope of their planned 50:50 joint venture (JV) in Europe, anticipating the European Commission’s rejection. Had the deal been cleared, it would have been the largest European steel deal since 2006 when Arcelor was taken over by industrialist Lakshmi Mittal.
In a statement on Friday, Tata Steel said, “The commission today discussed the proposed JV with both Thyssenkrupp and Tata Steel. Based on the feedback received, it is increasingly clear that the Commission is not intending to clear the proposed JV as it expects substantial remedies in the form of sale of assets of the proposed venture.” The transaction was aimed at extracting synergy benefits in an anaemic market and creating a “sustainable” steel enterprise. The two had inked the JV agreement to combine their steel businesses in June last year.
The proposed JV would have resulted in a significant deleveraging for Tata Steel as it would have transferred 2.5 billion euros to the JV company, which represents nearly 35-40 per cent of debt in its European business. At the end of March 2019, Tata Steel’s gross debt stood at about Rs 1 lakh crore, having reduced it by Rs 18,000 crore in the last six months.
Last month, Tata Steel had said it was working with Thyssenkrupp to secure the required regulatory approvals for the proposed 50:50 JV. The European Commission, it said, had issued its ‘Statement of Objection’ for which both firms had recently submitted a comprehensive package of solutions.
It further said that “commitments or improvements to the remedy package would adversely affect the basic foundation of the proposed joint venture and the intended synergies from the merger to such an extent that the economic logic of the joint venture would no longer be valid”.
Had the JV been formed it would have also realised synergies of 400-500 million euro. This, the management had said, would have improved the credit profile in the next 2-3 years. The management at Tata Steel had also said that, on a pro-forma basis, the turnover of the JV firm as on last reporting date would be around 17 billion euro and pre-synergy Ebitda (earnings before interest, tax, depreciation and amortisation) about 1.5 billion euro.
Meanwhile, Thyssenkrupp was expected to transfer about 3.6 billion euro of its pension liabilities to the JV. The transaction was subject to merger control clearance in several jurisdictions, including the European Union.
The company had expected that about a third of synergies would be in procurement and can be realised as soon as
the JV is formed. Synergies on network optimisation, which is another 20 per cent can be realised in the first 12 months itself, they had said.
As part of the deal, the two sides had agreed to combine the flat steel businesses of the two companies in Europe and the steel mill services of the Thyssenkrupp group through a 50:50 JV — a move that would have led to formation of a new player at the second position in the European steel market, having a combined turnover of 17 billion euro per annum and around 48,000 workers.
Tata Steel reiterated it remains committed to the strategy and will explore all options to achieve similar outcomes in the future.