London: Tata Steel has said it has agreed to the terms of a 50-50 joint venture with Germany's Thyssenkrupp to create Europe's second-largest steel company after Lakshmi Mittal's ArcelorMittal.
The JV, which has been under discussions since September last year, combines the European steel businesses of the Indian steel major with the German firm to create Thyssenkrupp Tata Steel BV.
The new steel company will have a total workforce of 48,000 employees spread across 34 sites.
"The Board of Tata Steel has approved the terms to create a 50:50 joint venture which will combine the European steel businesses of Tata Steel and Thyssenkrupp AG and has adopted resolutions for the signing of the definitive agreement," Tata Steel said in a statement on Saturday in accordance with the Securities and Exchange Board of India (Sebi) regulations.
In a presentation made to analysts/investors on the definitive agreement with Thyssenkrupp AG for a 50:50 JV, Tata Steel said that capital structure is designed to ensure financial robustness and in order to achieve that, it will transfer external debt of 2.5 billion euros.
The joint venture will issue warrants equivalent to 10 per cent of equity capital to Thyssenkrupp - subject to certain dilution provisions, can be monetised through secondary sale in case of IPO.
The JV formation will also result in deconsolidation of Tata Steel Europe from Tata Steel Group balance sheet and facilitate deleveraging, the company said in the presentation.
The combine will be aimed at creating a sustainable European steel enterprise - a strong new number two in European steel market with sales of 17 billion euros and shipments of 21 million tonnes.
The joint venture will create a strong pan-European steel company that is structurally robust and competitive, Tata Steel chairman N Chandrasekaran said.
"This is a significant milestone for Tata Steel and we remain fully committed to the long-term interest of the joint venture company," he said.
The definitive agreement includes a "proper compensation" for a valuation gap between the companies, which means that in case of an IPO of the JV, Thyssenkrupp will receive a higher share of the proceeds, reflecting an economic ratio of 55/45. Thyssenkrupp said it also has the right to exclusively decide on the timing for a potential IPO.
"The joint venture not only addresses the challenges of the European steel industry. It is the only solution to create significant additional value of around euros 5 billion for both Thyssenkrupp and Tata Steel due to joint synergies which cannot be realised in a stand-alone scenario.
"...With the joint venture we create a highly competitive European steel player - based on a strong industrial logic and strategic rationale. This will help secure jobs and value chains in European core industries," Heinrich Hiesinger, CEO of Thyssenkrupp AG said.
The merger was welcomed by workers' unions in Britain as the best solution to ensure the long-term future of Tata Steel's UK operations. The Indian company owns the UK's largest steelworks in Port Talbot, South Wales, employing thousands of staff.
"Steelworkers have fought hard to ensure the future of British steelmaking. As part of this joint venture, we have secured significant investment across Tata Steel's UK business, including a repair of Port Talbot's blast furnace number five, which could see it produce steel until at least 2026,? said Roy Rickhuss, General Secretary of the union Community.
Tony Brady, National Officer for Unite, stressed that his union would be seeking guarantees for jobs and investment for Tata Steel's UK "world class" workforce.
"Those steelworkers have made great sacrifices in working to secure a future for Tata Steel," he said.
"We will continue to ensure jobs and investment remain the key underpinning priorities within any final joint venture, which must equate to opportunities for our members in the UK, particularly after the difficult and uncertain recent times they have faced," Ross Murdoch, National Officer for GMB, said.
The local MP from the Port Talbot area in Wales, Stephen Kinnock, also welcomed the new JV announcement, calling for "sustained investment" in the region's steel industry.
"With Brexit looming large and Trump recklessly spoiling for a trade war there are still all sorts of risks and challenges facing our industry. By teaming up with Thyssenkrupp, Tata Steel has added strength and resilience to its recovery...," the Labour party MP, who has been part of crisis talks since Tata Steel had announced major changes to its European operations, said in a statement.
The proposed new JV is subject to merger control clearance in several jurisdictions, including the EU.
The JV will be managed as one integrated business through a holding company headquartered in the Amsterdam region of the Netherlands. Thyssenkrupp Tata Steel will have a two-tier governance structure that comprises a supervisory board and a management board each with six members, on which Thyssenkrupp and Tata Steel will have equal representation.
Thyssenkrupp will present the latest agreement to its supervisory board in an extraordinary meeting in the week beginning July 9.
Until the JV gets all its clearances, Thyssenkrupp Steel Europe and Tata Steel in Europe still operate as separate companies and as competitors.