Europe's steel sector is experiencing a surge of mergers and acquisitions on the back of the recent market recovery that will consolidate the sector and lower costs through synergies, but fail to reduce overcapacity issues as a result of takeover terms, according to a new report.
In a study for its clients published on Monday (18 June), ratings agency Moody's opined that approved M&As in public domain will not reduce steelmaking overcapacity because of the terms of the deals, which have been hashed out against the current backdrop of more stable sector fundamentals and will preserve steel capacity and jobs, at least initially.
ArcelorMittal's [Moody’s rating: Ba1 positive] acquisition of Italy's largest steelmaker Ilva, and the planned merger of Thyssenkrupp’s [Ba2 developing] and Tata Steel Ltd.'s [Tata, Ba3 positive] European steel operations into a new joint venture will further increase the market concentration in carbon steel.
"Smaller steelmakers will likely look to acquire rivals if the bigger deals go through in an effort to scale up their operations to better compete with these two larger groups. We also see the scope for niche M&A deals in specialty steel," said Gianmarco Migliavacca, Vice President and Senior Credit Officer at Moody's.
ArcelorMittal and Thyssenkrupp/Tata will face challenges in terms of integration, while SCHMOLZ + BICKENBACH AG's [S+B, B2 stable] will need to carry out a “planned turnaround” before it can effectively integrate the acquired Ascometal assets, Moody’s said.
Aperam S.A.'s [Baa3 stable] acquisition should be the least complicated to execute, but synergies are likely to be less, the agency added.
However, ongoing excess capacity in Europe may become a source of vulnerability in a downturn. “In such a scenario, larger groups like ArcelorMittal and Tata-thyssenkrupp would be better positioned given their economies of scale.”
Moody’s also said the takeover deals have limited impact on credit quality. “Some targets are small in relation to their acquirer [ArcelorMittal and Aperam] and companies have used existing capacity within their ratings to accommodate their acquisitions [Aperam and S+B]. Some of the assets acquired (Ilva and Ascometal) were underperforming and in receivership, limiting the acquirer's cash outlay,” the agency concluded.
