MT Arcelor Mittal New

By Natascha Divac 

FRANKFURT--German engineering conglomerate Thyssenkrupp AG and India's Tata Steel Ltd. have held talks on combining their continental European steel operations as overcapacity continues to weigh on prices and profits, people familiar with the matter said.

The companies have been holding high-level talks for over a year, the people said, adding it was unclear whether Thyssenkrupp's preferred structure is a tie-up of the two companies' steel assets in a joint venture. It also wasn't immediately clear where the talks now stand.

There is no guarantee a deal will be reached, one of the people said, adding an agreement is unlikely in the short term.

German daily Rheinische Post reported earlier that the companies were in advanced talks on combining their steel operations.

Thyssenkrupp's shares soared following the report, rising as much as 7.7%, in morning trading.

Tata said earlier this week it would explore the sale of its entire U.K. business, a move analysts say could pave the way for a combination of Tata's Dutch assets with Thyssenkrupp's European steel operations.

Should Tata sell its U.K. operations, its European "exposure would focus exclusively on Netherlands-based flat products business at Ijmuiden. Given Thyssen's interest in pursuing consolidation solely with another premium flat steel producer, we believe this cleaning-up of Tata's portfolio may help free-up the core Dutch assets for Thyssenkrupp", Jefferies analysts said in a note this week.

Credit Suisse analysts came to the same conclusion, saying Tata's planned exit from the U.K. was a prerequisite to any potential deal with Thyssenkrupp.

"This scenario in turn could lead to the creation of a 20 million tons high quality steel producer in Europe, and the eventual exit of steel for Thyssenkrupp, with arguably a strong synergy story," they said.

Tata Steel is Europe's second-largest steelmaker by production capacity, after Luxembourg-based ArcelorMittal SA. The company has in recent months announced several rounds of layoffs at its U.K. operations, which include steel mills across Wales and England. The company said in January it aimed to reduce its workforce to 14,000 once it completed consultations with unions about the proposed cuts.

The company employed 17,000 workers just before it began eliminating jobs in 2015.

Thyssenkrupp's chief executive, Heinrich Hiesinger, has said in the past consolidation in the sector would make sense, but has also stressed that combining assets was more likely than one company acquiring another.

Combining Tata's Dutch plant with Thyssenkrupp's operations could yield EUR1 billion in annual synergies and create roughly EUR6 billion in shareholder value, Credit Suisse said.

Hendrik Varnholt and Alex MacDonald contributed to this article.

Write to Eyk Henning at eyk.henning@wsj.com

(END) Dow Jones Newswires

April 01, 2016 08:09 ET (12:09 GMT)

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