Finland's Outokumpu Oyj is to buy ThyssenKrupp AG's stainless steel business in a deal worth 2.7 billion euros (2.2 billion pounds) designed to help 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 aims to boost profitability in a sector long seen as weighed down by overcapacity and ripe for consolidation.
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 favour the acquisition since it protects jobs in Finland, at least initially.
Analysts noted the acquisition would help boost the pricing power of all regional producers, which are battling cheap Asian imports of stainless steel, used in cutlery, kitchen sinks and washing machines.
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.
ThyssenKrupp will also receive new Outokumpu shares giving it 29.9 percent stake in the enlarged Finnish company.
The deal will move Outokumpu up from No.4 spot in the European sector, where its rivals include Aperam -- spun off by Arcelor Mittal last year -- and Acerinox , the world's No.1 stainless steel producer.
Credit Suisse said Aperam and Acerinox could be winners 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.
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.
ThyssenKrupp shares were up 3 percent at 21.74 euros by 1331 GMT, outperforming the German blue-chip DAX index <.GDAXI> which was up 1.0 percent. Outokumpu shares were down 13.9 percent.
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. Competitors are getting a free lunch.
Shares Aperam were up 6.0 percent and Acerinox was up 2.9 percent.
Analysts said they expect the Finnish state to participate in the rights issue if there are no job cuts at Outokumpu's production facilities in Finland.
This is the Finnish state underpinning their stainless industry, an analyst said who declined to be named.
The four top shareholders of Outokumpu are Finnish state investment agency 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 result in 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 sceptical whether the plant shutdowns -- which will remove 1.4 million tonnes 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 Europe has been loss-making for some time now and the recession aggravated overcapacity.
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 favour 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.
ThyssenKrupp is being advised on the deal by Rothschild , Citigroup and Deutsche Bank . Outokumpu's advisers are JP Morgan , Perella Weinberg and Nordea .
(Additional reporting by Terhi Kinnunen; Editing by Mark Potter and David Holmes)