Tata Steel Europe-Thyssenkrup proposed merger face European Commission hurdle

The Tata Steel Group Friday said the proposed merger of its European operations with German's Thyssenkrupp has almost fallen through as they are not in a position to rework the remedy packages to assuage the concerns of the European Commission.

Tata Steel Europe and Thyssenkrupp had signed definitive agreements on June 30, 2018 to create a 50:50 pan- joint venture that would have created a steel behemoth and help salvage the struggling Tata Steel Europe, which was created after the Tatas bought out the loss-making English alloy major Corus in 2007 for USD 13.1 billion.

The JV was expected to combine the European steel businesses of the Tatas with the German firm to create Thyssenkrupp Tata Steel. The new company would have workforce of 48,000 across 34 sites and produce about 21 million tonne steel with a revenue of around 15 billion euros.ThyssenKrupp in April had submitted a comprehensive package of solutions to the EC to get its nod for the merger.

"The Commission today discussed our proposed JV. But based on the feedback received from the Commission, it is increasingly clear that they are not intending to clear the proposal as they expect substantial remedies in the form of sale of assets of the proposed JV," Tata Steel said. Addressing the media over a concall, Tata Steel managing director TV Narendran said, "while we are disappointed that the JV has not happened, things have also improved in the last three-four years, and we will continue to pursue other options."

Stressing that its European operations have improved over the years, he said, "we have taken some difficult calls and in many different ways we are in a better place than we were three four years ago when we started the JV discussion." The steel major said the Commission had talked about their concerns relating to the automotive, packaged and electrical steels, based on the numbers and submissions of the combined entity.

The Commission opened an "in-depth" investigation into the proposed merger last October amid concerns that the deal may reduce competition in high-end steel segment.Following an agreed extension last month for further negotiations, Thyssenkrupp had submitted a "substantial" offer to the Commission, which is the executive arm of the 28-member economic and political bloc.

The biggest stumbling block in talks to the merger was largely resolved last May, when Tata said it had agreed the main terms of a deal with the British regulator to cut benefits for its 15 billion pound (USD 19.40 billion) British pension scheme.

"We worked on a remedy package, which in our belief, was pretty comprehensive and covered all the three areas, one of them being electrical steel which is anyway struggling across the continent and thereafter it was more focused on the scale of the remedy and the Commission is looking at increasing that scale of those remedies which beyond a point start affecting the merger logic and synergies," Tata Steel group chief financial officer Koushik Chatterjee said.

He further said they tried to enhance it and make it more specific to address the concerns of the Commission. But, "beyond a point it just doesn't work for us and that's where we are now and the competition rule demands a certain market test and obviously the customers wanted was more competition."That is their assessment, that is their judgement based on which we received the feedback for which we felt it was unlikely to be approved."

Chatterjee also noted that the steel business across Europe has gone through significant challenges post the global financial crisis. "The European market is a high cost market.It was a strategic move to create a consolidated pan-European business and I think the synergies would have flown from there. And the value of synergies are also important to run it sustainably and that's why we were looking at it," he said.

While the proposed JV was an important strategic initiative for it to create a sustainable portfolio in Europe that would have also helped de-consolidate European operations and de-leverage its balance sheet, Chatterjee said.

Thyssenkrupp in a separate statement said the EC took the improvements of the submitted covenants proposed by them as an opportunity to conduct another market test."The new market survey did not resolve the EC'sconcerns, although we had offered more significant concessions. From our point of the view further commitments or improvements would adversely affect the intended synergies of the merger to such an extent that the economic logic of the joint venture would no longer be valid. Consequently, we assume that the Commission will not approve the JV," it said.

Chatterjee further said it would still pursue to get strategic play as far as Europe is concerned and all options would be explored. The debt deleveraging was not dependent on the JV but on internal planning, Chatterjee said.

"The debt deleveraging plan on the gross debt has been very significantly done in the last six to eight months post the peak debt levels, and after Bhushan Steel acquisition."Going forward we are going to focus on more deleveraging. Compared to a USD 1-billion target, we done much more, in fact double that in the last six months at the gross level and we will focus on internal generation and also look at more asset sales," he said.

Narendran said even at a gross debt level of Rs 1 lakh crore against a Rs 30,000 operating profit, the company is well within the 3.5x which is where it wanted to be and now we are obviously trying to see if we can go below 3. The current long term debt on European business is 2.2 billion euros.

Currently, around two-thirds of Tata Steel's business is in India. With the commissioning of the 5 million tone phase 2 of the Kalinganagar plant in the next 30 months with value added product mix, its share of business along with its profitability will increase further, it said.