Ways2Capital Reviews : Tata Steel Stock Rises On JV Agreement With ThyssenKrupp

Shares of Tata Steel rose 1.5% after the company announced signing of definitive agreement with ThyssenKrupp for 50:50 JV combining European operations of the two companies. Tata Steel will transfer €2.5bn of debt to the JV and will hold 50% economic interest in the JV.

Agreement also includes a provision to change the holding structure to 45:55 (favoring ThyssenKrupp) on finalization of IPO process (at discretion of ThyssenKrupp) through issue of warrants without any consideration.

Company highlighted pre-synergy Ebitda of €1.5bn and definitive synergy benefits of €400-500m on combining the operations. With matching philosophy to maximize dividend payouts post ensuring sustainability of operations, this should help Tata Steel service the balance ~Rs170bn debt related to European operations. With likely finalization by end-2018, this further step is positive for Tata Steel.

Tata Steel will transfer €2.5bn debt (without any recourse to Tata Steel) to the JV while ThyssenKrupp will transfer un-funded employee pension liabilities amounting to €4bn. Management indicated that the pension liabilities are mature and should see sharp drop off in terms of yearly funding (currently accounted above EBITDA and in interest expenses) over the next few years.

Both the partners have in principal agreed on maximizing dividend payouts (ThyssenKrupp mentions a commitment to low-to-mid 3-digit million EUR dividend in its presentation) after meeting other necessary needs such as capex to sustain healthy operations. Management indicated that sustainable capex for the 21m tonne capacity stands at ~€900m annually).
 
The stock is currently trading at Rs575.25 up by Rs7.4 or 1.3% from its previous closing of Rs567.85 on the BSE. The scrip opened at Rs575.20 and has touched a high and low of Rs586.50 and Rs572.20 respectively.
 
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