FRANKFURT/DUESSELDORF (Reuters) – Germany’s Thyssenkrupp TKAG.DE and Sweden’s SSAB SSABa.ST could reap more than 500 million euros ($593 million) in annual cost savings if they agree on a steel tie-up, three people close to the negotiations said.
That would surpass the level of savings Thyssenkrupp and India’s Tata Steel TISC.NS aimed for in an attempt to merge their European steel divisions, a deal that was blocked by Brussels last year on concerns it would push up prices and reduce competition.
Discussions between SSAB and Thyssenkrupp are at an early stage and could still collapse, the people said.
“It’s the most synergetic of all the options in Europe,” one source said.
SSAB and Thyssenkrupp declined to comment.
Thyssenkrupp’s steel business, the second-biggest in Europe by sales, is reeling from weakening demand, cheaper Chinese imports and the botched attempt at a deal with Tata Steel.
Thyssenkrupp’s CEO Martina Merz said in May that there were no taboos in the restructuring of the steel unit, with options ranging from a full or partial sale to a government buy-in.
The main sticking point in talks with SSAB: around 4 billion euros of pension liabilities tied to Thyssenkrupp’s steel business, which the German company wants to bring into a potentially combined firm.
Thyssenkrupp could pare down the liabilities ahead of any deal closure by tapping proceeds from the sale of its elevator division, the people said.
While Thyssenkrupp is prepared to become a minority partner in a combined steel entity, SSAB is still wary about the size of the pension liabilities and has not yet decided whether to pursue a deal, they said.
Thyssenkrupp is under pressure to extract a firm commitment from its Swedish peer after receiving a non-binding bid for its steel unit from Britain’s Liberty Steel last month.
The German company prefers a partnership over a straight sale because it would give it exposure to an industry recovery, the people said.
A Swedish-German combination would have a European market share of about 11%, according to Jefferies estimates, less than the 14% of a Liberty Steel-Thyssenkrupp entity.
Thyssenkrupp and SSAB are also holding separate talks with Tata Steel, which is looking to restructure its European unit and whose Port Talbot plant in the UK has attracted the interest of Liberty Steel.
SSAB is looking at Tata Steel’s IJmuiden plant in the Netherlands and could decide to pursue such a deal instead of a transaction with Thyssenkrupp, the people said.
Tata Steel declined to comment.
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