Implications of the Tata-Thyssenkrupp merger

Tata Steel and Thyssenkrupp have signed a Memorandum of Understanding to merge their European operations.

The new company would be Europe’s second largest producer of steel after ArcelorMittal.

Background

The Tata Group is India’s largest conglomerate. Founded in 1868 by Jamsetji Tata, it is a holding company for a number of enterprises in various industries. There are currently 30 listed Tata enterprises. Tata Steel is a subsidiary of the main company. It is one of the top producing steel companies in the world. It is the second largest steel company in India. It’s annual crude steel deliveries amount to 23.88 million tonnes. In the financial year 2015-2016, Tata Group invested $9 billion in businesses around the world. Its worldwide revenue for that financial year was $103 billion.

Thyssenkrupp AG a German multinational conglomerate with 670 subsidiaries worldwide. It is one of the world's largest steel producers. In terms of revenue, it is the 10th largest steel producer.  

Analysis

Tata Group and Thyssenkrupp have been in talks for a merger for over a year. According to the Memorandum of Understanding that was signed, the two companies will be merging their European operations. According to Thyssenkrupp, it is a 50-50 merger and the new company will be called Thyssenkrupp Tata Steel.

In accordance to the agreement, Tata’s plants which are present in the UK and Netherland along with Thyssenkrupp’s German assets would be managed by a holding company. This lean holding company will be located in Netherlands. Once the new company is formed, it will become the second largest producer of steel in Europe. Its main rival would be ArcelorMittal.

The merged entity is likely to see annual synergies to the tune of €400-600 million. It will have pro forma sales of €15 billion. Additionally, it will have a presence in 34 locations across the continent and employ around 48,000 people. The group would ship 21 million tonnes of steel per year.

Tata Steel Chairman N. Chandrasekaran has spoken about the MoU noting, “The Tata Group and Thyssenkrupp have a strong heritage in the global steel industry and share similar culture and values. The strategic logic of the proposed joint venture in Europe is based on very strong fundamentals and I am confident that Thyssenkrupp Tata Steel will have a great future.”

Tata Steel published a statement talking about the benefits of the deal adding, “Thyssenkrupp Tata Steel would have a robust capital structure that is well matched by the underlying free cash flows of the company. It would benefit from the scale and distribution network capability of the combined assets to achieve quality, technology and cost leadership in the European steel industry.”

Assessment

Our assessment is that the latest MoU ends the uncertainty that has surrounded Tata Steel’s operations in the UK. This will lighten the load off the books for both the companies. We feel that the merger could see a job cut of about 4,000 employees from a combined workforce of 48,000. The region where there will be most number of job cuts is North-Rhine West Phalia. This might have some impact in the forthcoming German elections.