By Alexander Hübner and Matthias Inverardi
FRANKFURT/DUESSELDORF (Reuters) - India's Tata Steel (NS:TISC) and Germany's Thyssenkrupp (DE:TKAG) have been talking about combining their European steel operations, a person aware of the talks said on Friday.
The source, who did not want to be named because he is not authorised to speak publicly, said talks had been ongoing for about a year but declined to comment on their current status.
Tata's announcement on Wednesday that it plans to sell its cash-bleeding British unit sparked expectations that Europe's battered steel sector would now undergo a long-awaited consolidation, starting with a merger of Tata's Dutch and Thyssenkrupp's European steel operations.
Such a move would create Europe's biggest steelmaker after ArcelorMittal (AS:ISPA) and allow the combined company to cut capacity, supporting prices in the sector, which have been crushed by sluggish demand and cheap Chinese imports.
German newspaper Rheinische Post reported earlier on Friday that Tata Steel was in advanced talks to buy a stake in Thyssenkrupp's Steel Europe, sending shares in Thyssenkrupp 5.2 percent higher to the top of Germany's DAX index (GDAXI) by 1508 BST.
Thyssenkrupp declined to comment, as did a European spokesman for Tata Steel.
Analysts at Berenberg said it would make sense for both Tata Steel and Thyssen's Steel Europe to sell shares in an initial public offering (IPO) of any joint entity because that could translate into significant financial returns for the parent companies.
"For Tata Steel, in particular, an IPO would partly reward the company after the massive writedown of the UK assets' book value," the analysts said in a note to clients.
Tata, which entered the European steel market with a $12 billion acquisition of Anglo-Dutch Corus in 2007, will only produce steel in Europe in the Netherlands once it sells its UK business. It said on Wednesday it had extended "substantial financial support" to its UK business, which employs about 15,000 people, and written its assets down by more than 2 billion pounds.
Thyssen's Steel Europe unit is profitable, as are Tata's Dutch operations, and a Tata-Thyssen combination excluding the UK is seen as most likely.
A person familiar with the situation told Reuters that Thyssen's supervisory board had not yet discussed the matter, while two other sources with knowledge of the matter said that all of Europe's steel producers were talking to one another but nothing concrete was yet in sight.
Rheinische Post said Tata and Thyssenkrupp were discussing several scenarios, the most likely being a joint venture with Tata Steel holding an option to increase the stake later.
A combination of the two businesses could boost their combined earnings before interest, tax, depreciation and amortisation (EBITDA) by 400 million to 500 million euros, Berenberg said.
