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N. Chandrasekaran: A leaner Tata Steel can double capacity in 5 years

LiveMint logoLiveMint 20-09-2017 PTI

Mumbai: Tata Sons Ltd chairman N. Chandrasekaran is hopeful that a deleveraged Tata Steel Ltd is better positioned to grow faster and double capacity over the next five years after its deal with Germany’s Thyssenkrupp AG to merge their steel operations in Europe.

Tata Steel has around 13 million tonnes capacity at its two plants in Kalinganagar in Odisha and Jamshedpur and hopes to double it over the next five years organically or inorganically. “For Tata Steel India, which has huge opportunities to grow both organically and inorganically, this merger gives opportunities to focus on rapid growth so that we can maintain our leadership position and continue to grow and capture the markets,” said Chandrasekaran after announcing the 50:50 joint venture with Thyssenkrupp.

Under the terms of the Thyssenkrupp merger deal, Tata Steel Europe will become Thyssenkrupp-Tata Steel and will be based in Amsterdam. The entity will be the second-biggest European steelmaker after ArcelorMittal.

“The merger gives Tata Steel a better and stronger balancesheet for rapid growth. We are open to both organic and inorganic growth. Tata Sons will support Tata Steel in every manner to grow rapidly so that we double our capacity from around 13 million tonnes now,” Chandrasekaran said. “It (the merger) gives Tata Steel Europe a sustainable future as it ensures all our production facilities are free of capital constraints. It also offers good synergies in terms of products and R&D capabilities.”

Earlier in the day, Tata Steel signed an agreement with Thyssenkrupp to merge its operations in Europe in an equal joint venture company involving no cash transaction. “Tata Steel and Thyssenkrupp have signed an agreement to create the No.2 European steel company by combining the flat steel businesses of the two in Europe and the steel mill services of the Thyssenkrupp group,” Tata Steel said in a statement. The proposed joint venturem, which will be called Thyssenkrupp-Tata Steel would be headquartered in Amsterdam and supply premium and differentiated products to customers, with annual shipments of about 21.3 million tonnes of flat steel.

The combined steel entity is Europe’s second biggest after ArcelorMittal.

Tata Steel group executive director Koushik Chatterjee expects the merger to get all the clearances, including from anti- trust authorities, by December 2018 or early 2019. “We hope to begin due diligence from March 2018 and seek approvals from anti-trust authorities that we expect by December 2018 or early 2019,” Chatterjee said. On the impact of the deal on the balancesheet of Tata Steel, which is saddled with a debt of over Rs74,000 crore, he said of the total debt, €2.5 billion will move into the JV, which will have a revenue of €15.9 billion and an Ebitda of €1.56 billion. The remaining debt will be on the book of Tata Steel India as external debt.

The Thyssenkrupp-Tata Steel merger will be through a non-cash transaction based on fair valuation where both shareholders would contribute debt and liabilities to achieve an equal shareholder in the venture, Chatterjee said. On the savings the merger would bring in, Chatterjee said the JV expects annual synergies of €400-600 million on a sustainable basis, but refused to elaborate. The JV will also have an additional burden of around 3.6 billion euros of pension liabilities of Thyssenkrupp.

“Thyssenkrupp and Tata Steel are creating a sustainable future for their European steel activities by forming a JV. With Tata Steel, we’ve found a partner with a very good strategic and cultural fit,” Thyssenkrupp chairman Heinrich Hiesinger said in a separate statement.

While the Essen, Germany-based Thyssenkrupp has around 11.5 million tonnes capacity with backward integration, Tata Steel Europe, which includes the heavily loss-making British operations, has around 9.8 million tonnes installed capacity without any backward integration.

Whether the new JV will look at capacity expansion, Chatterjee answered in the negative, saying European steel market is not a growing one. So, the focus ideally should be on improving capacity utilisation and not capacity addition. He also ruled out shuttering production lines or any of the two plants—Talbot in Britain and Umeniden in the Netherlands—or trimming the workforce. While Tata Steel Europe employs nearly 18,000, Thyssenkrupp has 30,000. The new entity will employee 48,000 spread across 34 locations.

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