Tata Steel Ltd and German major thyssenkrupp AG have signed a memorandum of understanding (MoU) to create a 50:50 joint venture by combining the flat steel businesses of the two companies in Europe and steel mill services of the German company, a top company official said here on Wednesday.

The proposed 50:50 joint venture — “thyssenkrupp Tata Steel” — would be focused on quality and technology leadership, and the supply of premium and differentiated products to customers, with annual shipments of about 21 million tonnes of flat steel products, the steel maker said in a statement.

It said the joint venture would have a pro forma turnover of about €15 billion per annum (Rs 1,15,000 crore). It currently employs about 48,000 people spread across locations and would be headquartered in Amsterdam, the Netherlands.

“Based on our initial assessment, cost synergies in the range of €400-600 million per annum may be realised through integration of commercial functions, R&D and other supporting activities.

“Both shareholders have taken care to ensure that the balance sheet of the combined venture will be structured to ensure a sustainable business going forward,” Tata Steel’s Group Executive Director Kaushik Chatterjee said.

The proposed transaction in Europe also paves the way for significant de-leveraging of the Tata Steel group’s consolidated balance sheet and provides a platform for it to pursue future growth, he added.

According to him, the proposed combination of businesses would be formed through a non-cash transaction framework, based on fair valuation where both shareholders would contribute debt and liabilities to achieve an equal shareholding in the venture.

In a statement Heinrich Hiesinger, CEO of thyssenkrupp AG said: “Under the planned joint venture, we are giving the European steel activities of thyssenkrupp and Tata a lasting future. We are tackling the structural challenges of the European steel industry and creating a strong No. 2.”

“In Tata, we have found a partner with a very good strategic and cultural fit. Not only do we share a clear performance orientation, but also the same understanding of entrepreneurial responsibility toward workforce and society,” Hiesinger added.

The German steel maker also said, in the months ahead, due diligence will be conducted.

“In the process, the negotiating parties will give each other access to confidential business documents to the extent permissible between competitors.

“Based on this, as well as on discussions with the entire Supervisory Board, it is envisaged to sign a contract in early 2018. Closing — the effective start of the joint venture — could take place in late 2018 following anti-trust approval by the relevant authorities,” it said.

Commenting on the MoU, Tata Steel Chairman N. Chandrasekaran said: “The Tata Group and thyssenkrupp have a strong heritage in the global steel industry and share similar culture and values. The strategic logic of the proposed joint venture in Europe is based on very strong fundamentals and I am confident that the joint venture will have a great future.”

The proposed joint venture would have a robust capital structure that is well matched by the underlying free cash flows of the company, Chatterjee said.