Liability: A road sign points to the Tata steel works in Port Talbot, Wales, the least profitable factory of the joint venture. Tata Steel will remain liable for environmental risks in Britain. Picture: REUTERS
Liability: A road sign points to the Tata steel works in Port Talbot, Wales, the least profitable factory of the joint venture. Tata Steel will remain liable for environmental risks in Britain. Picture: REUTERS

Frankfurt/Duesseldorf — Germany’s Thyssenkrupp and India’s Tata Steel signed a final agreement on Saturday to establish a long-expected steel joint venture, the European steel industry’s biggest shake-up in more than a decade.

The deal comes after months of negotiations since an agreement in September.

Both companies hope it will help them respond to challenges in the volatile steel industry, including overcapacity.

The largest European steel deal since the takeover of Arcelor by Mittal in 2006, the 50-50 joint venture — to be named Thyssenkrupp Tata Steel — will have about 48,000 workers and about €17bn in sales.

Based in the Netherlands, it will be the continent’s second-largest steel maker after ArcelorMittal. It forms the core of Thyssenkrupp CEO Heinrich Hiesinger’s plan to turn his steel-to-submarines conglomerate into a technology company.

The deal is expected to be completed in the fourth quarter of 2018 or in the first quarter of 2019, depending on antitrust talks with the European Commission, the company said.

The venture does not only address the challenges facing the European steel industry, Hiesinger said, but is "the only solution to create significant additional value of around €5bn for both Thyssenkrupp and Tata Steel due to joint synergies which cannot be realised in a stand-alone scenario".

Tata Steel chairman Natarajan Chandrasekaran said the joint venture would create "a strong pan-European steel company that is structurally robust and competitive".

The deal comes as European steel makers face tariffs of 25% on their exports to the US, their biggest market. That might force local markets to absorb more of the steel production.

Since the tariffs were announced in late May, shares in European steel makers ArcelorMittal, Thyssenkrupp, Salzgitter and Voestalpine have lost 8%-17%. Hiesinger had faced pressure from activist funds Cevian and Elliott to extract more commitments from Tata Steel, whose European business has performed worse than Thyssen’s since the agreement was first announced, creating a valuation gap.

Thyssenkrupp said the deal included "proper compensation" for the gap, which it said was in the mid-triple-digit million-euro range: if the joint venture makes a widely expected initial public offering it would get a bigger share of the proceeds. Thyssenkrupp said that it had also secured the right to decide when a listing might take place, adding the new joint venture was aiming for a dividend payout in the low-to mid-triple-digit million-euro range.

The German group also said it now expected annual synergies of €400m to €500m from the transaction. Additional synergies were possible through managing capital expenditure and optimising working capital, it said.

Most of the synergies would be realised within the first three years of the joint venture, Thyssenkrupp’s finance chief, Guido Kerkhoff, said.

Tata Steel would remain liable for environmental risks in Britain, where its Port Talbot factory, the least profitable of the joint venture, is based, said Markus Grolms, vice-chairman of Thyssenkrupp’s supervisory board. Due to large pension liabilities, Port Talbot had been a major issue in early stages of the negotiations between the companies before a deal was agreed in 2017.

Reuters