The sale of ThyssenKrupp's stainless steel unit to Finland's Outokumpu is expected to lead to hundreds of job losses in Germany.
Finland's Outokumpu Oyj plans to buy ThyssenKrupp AG's stainless steel business in a deal worth €2.7-billion ($3.5-billion) designed to fend off cut-price Asian competition.
The deal, to be financed with a €1-billion rights issue of new Outokumpu stock, will lead to hundreds of job cuts in Germany as the Finnish stainless steel maker tries to boost profitability in a sector long weighed down by overcapacity and seen ripe for consolidation.
Outokumpu shares nevertheless fell on fears it may be overpaying and that the deal initially may benefit European rivals also competing with Asian imports of stainless steel used in cutlery, sinks and washing machines.
"There are some question marks. Outokumpu will be tied up for four to five years with units and employees they don't really need," SwedBank analyst Erkki Vesola said. "And competitors are getting a free lunch."
Outokumpu will pay ThyssenKrupp €1-billion in cash for its Inoxum unit – which has a market share of 35 to 40 per cent in Europe – and will take on liabilities of €422-million, as well as issuing a loan note of €235-million to ThyssenKrupp.
Finnish state entities, which control around 40 per cent of Outokumpu stock, will be expected to finance a proportionate part of the deal and the government may favour the acquisition since it protects jobs in Finland, at least initially.
Outokumpu aims to achieve cost synergies of between €225-million and €250-million by 2017 at the latest.
"The price tag is not dirt cheap and also the timetable for the cost synergies for the Outokumpu shareholders is really long," said Mika Karppinen of Evli Research.
The deal will move Outokumpu up from No. 4 spot in the European sector, where its rivals include Aperam – spun off by Arcelor Mittal last year – and Acerinox , the world's No. 1 stainless steel producer.
Credit Suisse said Aperam and Acerinox would benefit from the deal. "If a … merger goes ahead, we calculate the 'free rider' benefits at 15 per cent and 35 per cent market cap uplift for Acerinox and Aperam respectively," the bank said.
Shares in ThyssenKrupp, which will also receive new Outokumpu shares and gain a 29.9-per-cent stake in the enlarged Finnish company, outperformed the German blue-chip DAX index.
Analysts said they expect the Finnish government to participate in the rights issue if there are no job cuts at Outokumpu's production facilities in Finland. State investment agency Solidium declined to comment.
"This is the Finnish state underpinning their stainless industry," said an analyst who declined to be named.
Outokump's top four shareholders are Solidium with 30.84 per cent, the Social Insurance Institution of Finland with 8 per cent, Ilmarinen Mutual Pension Insurance Co. with 3.9 per cent, and Finland's State Pension Fund with 1.9 per cent.
Outokumpu said the combination with Inoxum would lead to 850 job cuts in Germany as two melting shops in Krefeld and Bochum, both in Germany's Ruhr Valley industrial heartland, are shut in stages. It did not say anything about Finnish jobs.
The two companies pledged no other production sites would be shut until at least the end of 2015 and there would be no mandatory job cuts until then.
But some were skeptical whether the plant shutdowns – which will remove 1.4 million tonnes of annual capacity or 16 per cent of output in Europe – will be sufficient for a turnaround.
Until five years ago, Europe was a net exporter of stainless steel, but global capacity rose swiftly and cheaper production in Asia now satisfies around 20 per cent of Europe's demand. Stainless steel production in the region has been loss-making for some time.
China, South Korea and Taiwan are the top exporters to Europe of stainless steel, whose non-corrosive qualities also make it ideal for vats and pipes in the chemicals, oil and gas sectors.
"What is negative is that at the same time they [Thyssen and Outokumpu]are doing a favour for competitors, when capacity in Europe is cut. … This will not prevent Asian competitors from importing more stainless to Europe," Swedbank's Mr. Vesola said.
Germany's IG Metall labour union has approved the planned sale and the supervisory board of ThyssenKrupp was expected to formally give its blessing to the agreement later on Tuesday.
ThyssenKrupp is being advised on the deal by Rothschild , Citigroup and Deutsche Bank. Outokumpu's advisers are JPMorgan, Perella Weinberg and Nordea.