Tata Steel Ltd. will transfer about two-thirds of its European arm’s debt to the proposed joint venture with Germany’s Thyssenkrupp AG that will create Europe’s second largest steelmaker.
About €2.5 billion of Tata Steel Europe’s senior debt will go to the joint venture, said Koushik Chatterjee, group executive director at the Indian steelmaker. Debt of Tata Steel Europe will not be consolidated with Tata Steel, Chatterjee said. The company has nearly $8 billion debt, of which $3.2 billion was term loans and the remaining working capital financing, he said. Thyssenkrupp will transfer around €3.6-4 billion of debt, which is mainly steel-related pension liabilities and some legacy business liabilities, Chatterjee told BloombergQuint in an interview.
The merger allows Tata Steel to streamline its operations to cut costs, especially in the U.K. amid overcapacity and cheaper supply from China. It struck a $710-million settlement with the British Pension Scheme and offered to sponsor a new scheme that entailed lower annual increases, paving the way for the deal with the German company.
The European joint venture, to be headquartered in Amsterdam, the Netherlands, will have around €1.5 billion of operating income, and €6.5 billion of debt, Chatterjee said.
That is similar to any of the good steelmaking balance sheets you will see.Koushik Chatterjee, Group Chief Executive Director, Tata Steel
The capital structure is “extremely sustainable” and has been framed “with enough headroom for downside risks going forward”, said Chatterjee.
The deal will be signed in early 2018, and is expected to reach closure by 2019. The financial impact will reflect on Tata Steel’s books after it is completed, he said.
Europe's second and third largest steelmakers are hoping to boost the productivity of their plants, improving on capacity utilisation at a time when steel prices are still recovering. Consolidation of business will improve utilisation and profitability of Tata Steel Europe, said Chatterjee. The companies have no plans to expand capacity, he said, adding that they would use existing capacities by seeking opportunities outside Europe.
Cost synergies that the two hope to achieve will fructify in around three years, said Chatterjee. Nearly €400-600 million of annual synergies are foreseen, according to their joint media statement.
It comes at the loss of 4,000 jobs. Thyssenkrupp’s management, in a webcast, said that the job cuts will be shared equally between the two partners. There will be 2,000 job cuts each in the administration and production side.
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