Tata Steel Europe and Thyssenkrupp have agreed to create a 50:50 joint venture after signing of a memorandum of understanding (MoU) in September 217.Parent company Tata Steel in a filing to stock exchanges over the weekend said the board has adopted resolutions for the signing of the definitive agreement.
The formal execution of the definitive agreements is expected shortly.
The proposed JV between two of the world's major steel companies will combine Thyssenkrupp's and Tata Steel's European steel operations to create Europe's second-largest steelmaker after steel tycoon Lakshmi N Mittal's ArcelorMittal.
However, the agreement has seen its fair share of hiccups as Reuters in June reported quoting sources both groups were struggling to finalise the joint venture, citing a valuation gap of between 500 million and 3 billion euros ($587 million to $3.5 billion) that needed to be addressed in negotiations.
Thyssenkrupp's supervisory board vice chairman and trade union secretary at the IG Metall union, told Reuters in the same report, "We will not support raising the debt level for the joint venture."
In April, Jens Overrath, chairman of the executive board, Thyssenkrupp Electrical Steel said, "India is a very important market for us and we are the only manufacturers of CRGO steel in the country. The expansion will enable us to enhance the innovative approach that we take towards all our products, thereby providing cutting edge technology to all our offerings."
He was speaking on the sidelines of an event to inaugurate the expanded cold rolled grain oriented (CRGO) electrical steel unit at Nashik in Maharashtra.
Here's what brokerages have to say on the final contours of the deal: Jefferies:
"Deal term changes reflect weaker margin trends at Tata Steel Europe versus Thyssenkrupp (TKA) in recent quarters, but concessions agreed by Tata look modest. Uncertainty about the JV and concerns about a lower debt transfer had been near-term overhangs, but should ease now."
The brokerage has a 'hold' rating on Tata Steel with a price target of Rs 586 per share.Bhaskar Basu, author of Jefferies report said, "Under the revised deal, the JV will issue warrants equivalent to 10% of equity capital to TKA prior to a potential IPO. This effectively lifts TKA's economic interest in joint venture to
55% (Tata's will fall to 45%), which TKA could monetise via secondary market sale upon IPO."
TKA will have exclusive rights to determine timing, he further said.
The brokerage, with its 'buy' rating on Tata Steel stock said, "Our revised some of the parts analysis (SoTP) reflects Tata’s reduced economic interest, lower
profitability. A major overhang is past, though bloated balance-sheet remains a concern with the impending Bhushan Power deal."Ritesh Shah and Ayush Sharma of Investec Securities, in a report dated June 30, 2018 said, "Both Thyssen Europe and Tata Steel Europe have 29% of its shipments targeting automotive industry. Higher concentration in this segment would imply better pricing power for the potential JV. Likewise, packaging also accounts for similar 13-14% of mix for both companies. TSE has significant exposure to manufactured goods, construction; segments which haven’t been directly classified under Thyssen Europe
implying potential to cross – sell its value add products."
Ace investor Rakesh Jhunjhunwala is bullish on Tata Steel as well.
In an exclusive interview to CNBC-TV18 in June this year, he said, "I have put my bet basically on Tata Steel. I am extremely bullish. I feel they have got great value added."