Germany's Thyssenkrupp AG (TKAMY) and India's Tata Steel have signed an agreement to merger the two group's steel operations in joint venture that could generate sales of around €15 billion and ignite a stand-off between unions, management and a key activist shareholder.

The two groups said the memorandum of understanding is a preliminary agreement and will be called Thyssenkrupp Tata Steel upon completion. The new unit will be run from a lean holding company in the Netherlands and have around 48,000 employees across 16 industrial locations, making in the second-largest steel producer in Europe behind ArcelorMittal SA (MT) . The groups expect a complete deal by 2018.

"Under the planned joint venture, we are giving the European steel activities of thyssenkrupp and Tata a lasting future," said Thysenkrupp CEO Heinrich Hiesinger. "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."

Thyssenkrupp shares were marked 4% higher in the opening 30 minutes of trading in Frankfurt and changing hands at €26.20 each, extending their six-month gain to around 11.77%.

The agreement, which will include around 4,000 job cuts across both Thyssenkrupp and Tata, comes just hours after the German group's labor representatives, who hold around half of the company's board seats, said they would "examine" the proposal at a meeting this weekend, noting that "if in the end our conditions are fulfilled and the whole unit is debt-free then it's a possibility."

However, both labor reps and Thyssenkrupp's activist shareholders, including Cevian Capital, have pushed for alternatives to a Tata Steel tie-up that included a split of the steel operations from the company's engineering division.

Tata of India and Germany's ThyssenKrupp first announced talks in July last year soon after Tata abandoned plans to sell or close its UK strip-steel operations, centered around the U.K.'s biggest steel smelter in Port Talbot. Tata also has significant steel operations in the Netherlands.

Steel has become an increasingly small part of ThyssenKrupp's operations and now accounts for between 20% and 25% of its revenues and about 37% of its Ebitda based on third quarter figures.

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