* ThyssenKrupp agrees sale of Inoxum to Outokumpu
* Deal includes cash, Outokumpu taking Inoxum debt
* Outokumpu to raise 1 bln euros via rights issue
* Two sites to close with loss of 850 jobs
* Outokumpu shares fall 14 pct
By Marilyn Gerlach and Eero Vassinen
FRANKFURT/HELSINKI (Reuters) - Finland's Outokumpu Oyj OUT1V.HE plans to buy ThyssenKrupp AG's TKAG.DE stainless steel business in a deal worth 2.7 billion euros ($3.5 billion) designed to fend off cut-price Asian competition.
The deal, to be financed with a 1 billion euros 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 14 percent to 6.33 euros by late trade on fears it may be overpaying and that the deal initially may benefit European rivals also competiting 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,” said SwedBank analyst Erkki Vesola. “And competitors are getting a free lunch.”
Outokumpu will pay ThyssenKrupp 1 billion euros in cash for its Inoxum unit -- which has a market share of 35 to 40 percent 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 percent of Outokumpu stock will be expected to finance a proportionate part of the deal and the government may favor the acquisition since it protects jobs in Finland, at least initially.
Outokumpu aims to achieve cost synergies of between 225 and 250 million euros 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 APAM.LU -- spun off by Arcelor Mittal ISPA.AS last year -- and Acerinox ACX.MC, 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 percent and 35 percent 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 percent stake in the enlarged Finnish company, were up 2.3 percent at 21.62 euros, outperforming the German blue-chip DAX index .GDAXI.
Shares in Aperam were up 6.0 percent and Acerinox was up 2.9 percent.
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,” an analyst said who declined to be named.
Outokump’s top four shareholders are Solidium with 30.84 percent, The Social Insurance Institution of Finland with 8.0 percent, Ilmarinen Mutual Pension Insurance Co with 3.9 percent, and Finland’s State Pension Fund with 1.9 percent.
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 tones of annual capacity or 16 percent 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 percent of Europe’s demand. Stainless steel production in the region has been loss-making for some time.
China, 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 favor for competitors, when capacity in Europe is cut... This will not prevent Asian competitors from importing more stainless to Europe,” Swedbank’s 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.
($1 = 0.7625 euro)