Germany’s Thyssenkrupp (TKAMY) and India’s Tata Steel (TATLY) struck a preliminary deal Wednesday to merge their European steel operations in a 50-50 joint venture to create the continent’s no. 2 steelmaker after ArcelorMittal (MT).
The deal will not involve any cash, Tata Steel said, adding that both groups would contribute debt and liabilities to achieve an equal shareholding and remain long-term investors.
The companies say they need to consolidate to address overcapacity in the European steel market, which faces cheap imports from China and elsewhere, subdued demand for construction and inefficient legacy plants.
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Thyssenkrupp shares were indicated up more than 5 percent in pre-market trade in Germany while Tata Steel was up 0.7 percent in India.
Tata Steel last month reached a landmark deal that will allow it to reduce the equivalent of $20 billion in pension liabilities. Those liabilities have been seen as the main hurdle in over 18 months of talks between the companies.
“Under the planned joint venture, we are giving the European steel activities of Thyssenkrupp and Tata a lasting future,” Thyssenkrupp CEO Heinrich Hiesinger said. “We are tackling the structural challenges of the European steel industry and creating a strong No. 2.”
The new company, to be named Thyssenkrupp Tata Steel, will be headquartered in Amsterdam, the companies said in statements on Wednesday after signing a memorandum of understanding (MoU). “Excellent news,” tweeted Dutch Prime Minister Mark Rutte.
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The MoU, widely expected after Thyssenkrupp last week said a deal could be reached this month, outlines annual synergies of 400-600 million euros ($480-720 million) as well as up to 4,000 job cuts, about 8 percent of the joint workforce.
“This is a key positive catalyst supporting our thesis that Thyssenkrupp’s core capital goods operations deserve a meaningful rerating,” Jefferies analyst Seth Rosenfeld wrote in a note, reiterating his “buy” rating.
Thyssenkrupp also has profitable businesses in elevators and high-tech car parts.
The MoU will be followed by negotiations about the details of the transactions as well as due diligence before a joint venture contract can be signed at the beginning of 2018, Thyssenkrupp said.
The deal will require the approval of Thyssenkrupp’s supervisory board and Tata Steel’s board of directors as well as that of the European Commission.