By Christopher Alessi and Alex MacDonald 

FRANKFURT -- German conglomerate Thyssenkrupp AG on Monday confirmed it is in talks with India's Tata Steel Ltd and other steel groups over a potential tie-up, giving the strongest indication yet that the German firm would help drive a new wave of expected consolidation in the beleaguered European steel sector.

Thyssenkrupp's announcement comes as European steelmakers are kicking off a flurry of merger-and-acquisition activity to cope with a protracted steel-capacity glut and a wave of cheap steel imports from countries like China, the world's largest steel-producing nation.

"We have repeatedly emphasized that in this situation we believe a consolidation of the European steel industry is necessary," a spokeswoman for Thyssenkrupp said Monday. "Among others, we are also in talks with Tata Steel," she added.

The spokeswoman cautioned that it was still unclear "when and with whom" such a merger could transpire.

Tata Steel had said late last week that it was in talks with Thyssenkrupp about creating a European flat-steel products joint venture, prompting the German firm's confirmation Monday. In April, The Wall Street Journal reported that the two companies had been holding high-level talks for more than a year about combining their European steel operations.

At that time, Tata Steel had only planned to combine its Dutch assets with Thyssnekrupp's steel assets in Germany while hiving off its ailing U.K. business to other parties. Tata Steel, however, changed tact last week and said it would now include a sizable part of its U.K. business in the sale process as well. This includes a series of plants dotted throughout Britain that employ 9,000 people, including Britain's biggest plant, in Port Talbot, Wales.

"We believe such a deal would be beneficial in principle for both players," according to analysts at Deutsche Bank. "Nevertheless, a tie-up including the U.K. assets could make this a much higher risk transaction" for Thyssenkrupp, in part due to Tata U.K.'s very high pension liabilities, the analysts wrote in a note on Monday.

Meanwhile, Luxembourg-based steel titan ArcelorMittal SA said late last month it was teaming up with Italy's privately owned Marcegaglia SpA to take over the ailing Ilva steel plant in Taranto, Italy, Europe's largest single steel plant and a producer of flat-steel products.

Both deals, if they go ahead, would further solidify ArcelorMittal and Thyssenkrupp's No. 1 and No. 2 in the European flat-steel market. It would catapult ArcelorMittal's market share to 40% from 33% and Thyssen's market share to 25% from 13%, supposing the joint ventures are counted as part of each respective steelmaker.

Analysts say the potential deals would be a defensive move aimed at controlling excess capacity by giving the bigger players greater flexibility to shift production between units to better align production with demand, thereby creating a more stable steel price environment.

The talks between Europe's major steel players come as European steelmakers have shed thousands of jobs and closed loss-making plants in response to an influx of cheap steel from China and relatively anemic EU steel demand growth. EU steel demand is still hovering below the peak level seen before the onset of the global financial crisis in 2008.

The European Commission has sought to protect EU steelmakers by imposing trade tariffs on cheap steel imports, but not quickly or pervasively enough to stave off the damaging effects from the influx.

After Tata Steel said in March that it planned to exit its entire loss-making U.K. steel business, in April it sold its European long products business for a nominal sum to a British family investment vehicle.

Meanwhile London-based Caparo Industries PLC initiated bankruptcy proceedings last year for 16 of its 20 steel businesses, while Thailand's Sahaviriya Steel Industries PLC shut its steel plant in Redcar, northern England, resulting in 1,700 job losses.

"Failure to progress further with sector consolidation now would be irrational, diluting any future right to complain about Chinese steel overcapacity," analysts at Berenberg Bank wrote in a note on Monday.

The analysts also noted that a deal would allow Thyssenkrupp to be recognized by the market more as a diversified industrial group, rather than a traditional steel player, boosting its valuation.

This isn't the first time the EU steel industry has undergone a bout of consolidation. Mittal Steel merged with Arcelor in 2006 to create the world's largest steelmaker by output, only to shut four loss-making blast furnaces in Europe up to seven years afterward following a protracted downturn in steel demand in the wake of the financial crisis.

"We see consolidation in times of extreme pain and extreme riches," said Jefferies analyst Seth Rosenfeld. He noted that the recent spate of consolidation was taking place following a severe year of hardship in 2015 and early 2016. The erection EU steel tariffs has given steelmakers more "incentive to restructure with the understanding that they would be able to retain the cost savings without [losing] the benefits" to a wave of cheap imports, Mr. Rosenfeld said.

Since taking over five years ago, Chief Executive Heinrich Hiesinger has moved to reshape what was then a staid steel giant around its more lucrative capital goods businesses, including its profitable elevator and escalator division.

As part of that effort, Mr. Hiesinger sold Thyssenkrupp's Alabama-based steel-rolling and coating plant to a consortium of ArcelorMittal and Nippon Steel & Sumitomo Metal Corp. for $1.55 billion. He has also indicated that he would like to sell the last part of the company's Americas steel operations, a plant in Brazil, when market conditions allow.

Write to Christopher Alessi at christopher.alessi@wsj.com and Alex MacDonald at alex.macdonald@wsj.com

 

(END) Dow Jones Newswires

July 11, 2016 12:52 ET (16:52 GMT)

Copyright (c) 2016 Dow Jones & Company, Inc.
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