ThyssenKrupp and Tata Steel signed an agreement to combine their steel businesses through a fifty- fifty joint venture and create the second player in Europe behind ArcelorMittal. European assets of India’s Tata Steel’s are valued at up to $1,026t. Is that realistic? Given that the major part of the joint venture valuation would be the €400-600m in expected synergies (30-45% of current EBIT), UBS analysts consider that:
“ Synergies would account for up to 45% of the equity value. While achievable, in our view, it comes with a considerable risk to fall short, too.”
ThyssenKrupp mentioned in the operation presentation that it expects a significant equity uplift. According to UBS:
“Assuming the company will generate €400-600m, the equity lift would be between €1.1-y.ybn – almost double the equity ThyssenKrupp had post 3Q’17 (€2.2bn). However, assuming that only half of the synergies will come through would result in no equity uplift at all.”
On the other hand, Citi Research experts note those synergies could also imply a target price upside of Rs95-145/sh, considering they play out immediately.
Debt contribution by Tata Steel’s Europe would be €2.5bn ($3bn). Thyssen will not transfer debt however would transfer pension liabilities and some liabilities related to the steel business of around €4bn ($4.8bn).Interest cost for Tata Steel’s Europe debt is near 3.75%.
The process will now move to the next phase – due diligence,negotiations, approvals, closing conditions.The transaction should close by Dec18/Mar19.