LONDON (Reuters) - Germany's Thyssenkrupp is optimistic about progress made by Tata Steel to restructure its UK pensions liabilities, investors and analysts say, but there are still issues to overcome before the two firms can merge their European steel assets.
India-based Tata said in May it had agreed the main terms of a deal with the British regulator to cut benefits for its 15 billion pound ($19.40 billion) UK pension scheme - formerly the main stumbling block in merger talks between the two firms. Though Tata would continue to back a new pension scheme under the terms of a deal that Thyssenkrupp has declined to publicly comment on, analysts and investors say the German firm sees the deal as significantly de-risking Tata's pension.
Thyssenkrupp is waiting, however, for the final terms,likely to be approved this month, and is also concerned about factors such as political uncertainty in the UK due to Brexit, achieving fair value for its assets, and winning over German unions. "It seems like the pension deal is good enough (forThyssenkrupp)," said one top-20 Thyssenkrupp investor. A top-10 investor and two other top-20 investors contacted by Reuters
were also optimistic about the pension deal.
Thyssenkrupp and Tata Steel declined to comment.
On a recent roadshow with investment bank Jefferies, Thyssenkrupp's chief financial officer "communicated confidencethat a merger with Tata is nearing as progress is made torestructure Tata's UK pension", the bank said in a note. Jefferies estimates the merged entity could save 500 millioneuros through synergies.
A source familiar with Thyssenkrupp's thinking said CFO Guido Kerkhoff was guiding the market that merger talks were well advanced.
Kerkhoff recently told the head of Thyssenkrupp's steel works council the firm will make a decision on its Europeansteel merger by end-September. Merger talks have been underway for nearly two years.
Thyssenkrupp is encouraged that the new pension scheme Tata will back will start off in surplus, analysts say.
This is thanks to a 550 million pound payment Tatawill make into the scheme, and to benefit cuts such as linking future pension payout hikes to a lower measure ofinflation - a move that will save more than 2 billion pounds.
Thyssenkrupp is waiting, however, for details on other terms, including a 33 percent equity stake that the new pension will hold in Tata's UK business.
This could translate into a stake in a merged entity, making the pension scheme an additional part-owner in a company one investor estimated would be worth 4 billion to 5.5 billion euros.
Tata and Thyssenkrupp are keen to combine their Europeanoperations in order to cut costs, tackle over-capacity andachieve industry consolidation. Thyssenkrupp's ultimate plan is to exit steel altogether by spinning off the joint venture. "A 50/50 (or less) type of joint venture remains thefavoured structure from Thyssenkrupp's side. Thyssenkrupp couldshift up to 3 billion euros worth of pensions into the jointventure to rebalance the ownership structure," DeutscheBank said in a note. Thyssenkrupp's European steel business is more valuable thanTata's, meaning it can offload 3 billion euros worth of pension debt in order to split the joint venture on a 50/50 basis or less, analysts and investors say.
One investor close to Thyssenkrupp said a "a sub-50 percent holding" for the German firm is a "very real possibility".
Thyssenkrupp's shares, trading at two-year highs, rose 5 percent on Monday on German press reports that a merger decision is near.
However, over 18 percent of shares available for shorting are out on loan, according to data from FIS’ Astec Analytics, signalling that some investors believe the price will fall.
"We believe the future of Thyssenkrupp is not steel, it’stechnology," senior portfolio manager Ingo Speich of shareholder Union Investment said. "Steel production only makes sense if you can release scale benefits.” ($1 = 0.7734 pounds)
(Additional reporting by Arno Schuetze, Tom Kaeckenhoff, Georgina Prodhan, Maiya Keidan and Pratima Desai; editing by Susan Thomas)