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 assetsin 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 12:55 ET (16:55 GMT)
Copyright (c) 2016 Dow Jones & Company, Inc.
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