January 26, 2012 / 5:35 PM / 7 years ago

Thyssen's stainless deal with Outokumpu

FRANKFURT (Reuters) - Finland’s Outokumpu (OUT1V.HE) is in talks with steelmaker ThyssenKrupp (TKAG.DE) over a stainless steel tie-up which could create a European heavyweight in a sector battling cheap imports, weak demand and excess capacity.

The two sides, long seen as potential partners, have provided little detail on a potential deal which analysts and industrial sources say could take the form of a merger, an outright purchase by Outokumpu or a tie-up with only some of Thyssen’s stainless assets.

Under the broadest possible agreement, the result would be Europe’s largest producer by a substantial margin, worth more than 3 billion euros, according to analysts, assuming all of Thyssen’s Inoxum stainless steel assets are included.

Bank of America analysts estimated a 5.5 billion euros enterprise value, which includes debt, for a combined entity.

A key element of negotiations will be the Finnish government, which holds a 31 percent stake in Outokumpu through investment firm Solidium, and will seek to guarantee Finnish jobs as part of any deal.

Here are potential options:

OUTOKUMPU TAKES MAJORITY STAKE IN INOXUM

This is seen as the most likely outcome.

Loss-making Outokumpu, with a market capitalization of 1.4 billion euros, would need to raise as much as 1 billion euros to take a 51 percent stake in Inoxum.

It would then use new shares and cash raised with the capital hike to pay ThyssenKrupp for the majority stake.

For ThyssenKrupp, the sale could allow it to shift some of its hefty debt burden to Inoxum.

Outokumpu would assume management control of the combined entity, with ThyssenKrupp as minority owner of Inoxum and shareholder in Outokumpu. Inoxum could be listed later, when market conditions are more favorable.

OUTOKUMPU MERGES WITH SOME OF THYSSEN’S STAINLESS BUSINESS

Outokumpu could take some of Inoxum’s stainless business, including its Termi plant in Italy, operations in Mexico and the United States but not some of the plants in Germany, which ultimately could be shuttered.

Closing the German operations would help resolve Europe’s crippling overcapacity in stainless steel.

The core assets of the new entity would be plants in Italy and Finland.

Outokumpu could also take only assets in Germany, leaving Thyssen to sell remaining stainless units to other buyers. The inefficient and idiosyncratic structure of Thyssen’s stainless assets in Germany make this less likely.

OUTOKUMPU BUYS INOXUM OUTRIGHT

This is seen as a less likely outcome, given Outokumpu debt.

Outokumpu would raise cash via a capital hike and also issue new shares to buy Inoxum and then integrate it into its own business.

ThyssenKrupp would become a minority shareholder in the enlarged entity, but all debt would pass to already debt-burdened Outokumpu.

One analyst said this deal would effectively list Inoxum by the back door and, if successful, would raise the valuation for stainless steel companies across the board.

Reporting by Marilyn Gerlach and Terhi Kinnunen; Editing by Clara Ferreira-Marques and David Cowell

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