September 20, 2017 / 10:25 AM / a year ago

Breakingviews - Tata Steel JV pays ThyssenKrupp four dividends

LONDON (Reuters Breakingviews) - ThyssenKrupp Chief Executive Heinrich Hiesinger is finally getting real on steel. More than two centuries after Friedrich Krupp started making cast steel in Germany’s Ruhr region, the industrial group is backing out of the industry. The historic joint venture with Indian rival Tata Steel unshackles it from a fickle, capital-intensive business which for years has been struggling to earn its cost of capital. It can pay ThyssenKrupp dividends on four levels.

A worker controls a tapping of a blast furnace at Europe's largest steel factory of Germany's industrial conglomerate ThyssenKrupp AG in the western German city of Duisburg December 6, 2012. REUTERS-Ina Fassbende

The new company, in which both companies will own a 50 percent stake, will be in a better position to benefit from consolidation. It expects to cut costs by 400 to 600 million euros a year, mainly by slashing back office expenses, optimising distribution and squeezing suppliers. At the mid-point of that range those synergies, taxed at 30 percent and capitalised, are worth 3 billion euros in today’s money – after deducting the 500 million euros or so that will have to be spent to realise the savings. Half of that belongs to ThyssenKrupp.

The German group’s flimsy balance sheet also benefits. Hiesinger will transfer pension and other liabilities worth 4 billion euros to the joint venture. Moreover, its equity stake in the business is likely to be worth around 6 billion euros, according to a person familiar with the matter, more than the 5 billion euros in capital the group currently has tied up in the business. ThyssenKrupp can also book around half the net present value of the synergies as equity. Though no cash is changing hands, the group’s financial position will improve. 

Workers will also fare better than if the two companies had continued to operate separately. The joint venture will cut about 4,000 jobs, equally shared between the two partners. Earlier this year, the IG Metall union warned that ThyssenKrupp’s standalone restructuring plan would shed the same number of jobs at the German group alone.

Much can still go wrong. The two sides have not yet started due diligence. Antitrust watchdogs still have to approve the deal, as does ThyssenKrupp’s supervisory board, where workers control half of the seats.

If everything goes as planned, Hiesinger’s task will not be complete. With steel and its pension obligations out of the way, it will be even harder to justify ThyssenKrupp’s eclectic structure. The case for keeping elevators, submarines, plant engineering and auto parts under one roof has yet to be made.


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