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Tata Steel and ThyssenKrupp to reach 15bn euro compromise, deal possibly this week

According to media reports, ThyssenKrupp and Tata Steel are very close to signing a JV regarding the merging of their European operations. A deal can be expected as early as this week. The size of the deal is estimated at 15bn euros ($17.4bn). The merger between both these companies would create the second largest steelmaker in Europe with deliveries of more than 21mn tonnes.

Investors in ThyssenKrupp have criticized the management for delays in the creation of the JV, which was supposed to be signed in March 2018. Investors had also highlighted that the original terms of the deal would be unfavourable for ThyssenKrupp. The delay for the JV has been regarding the valuation gap created by the financial outperformance of ThyssenKrupp over Tata Steel Europe. This has created a valuation gap estimated between 500mn to 3bn euros. Possible solutions to resolve the valuation gap include: (1) a cash payment to Thyssenkrupp, (2) change in the 50:50 equity structure of the JV, (3) lowering the debt transferred to the JV or (4) limiting dividend payments to Tata Steel for a number of years.

Tata Steel Ltd (TSL) would benefit from (a) ~2% volume growth in domestic steel production supported by spending on infrastructure and (b) steel spreads to stabilise in medium term due to domestic demand. The company is expected to see revenue and EBITDA CAGR of 2.8% and 8.9% over FY18-20E respectively with an EBITDA margin of 17.7% in FY20E. EBITDA margins are also likely to expand by ~192bps owing to better utilization levels and cost rationalisation for Tata Steel Europe. The stock is currently trading at 7.3x FY20E EPS.

TSL is an international steel company with a manufacturing presence in Europe and Asia. The total steel capacity for the company stands at 27.5mn tonnes. The company is planning to upgrade the Kalinganagar plant, which would take the domestic steel capacity of TSL to ~18mn tonnes. Domestic steel production stood at 12.48mt in FY18, up 6.8% yoy. Steel production for TSL Europe stood at 10.68mt in FY18.

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