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DUESSELDORF, Germany/HELSINKI (Reuters) - Germany's ThyssenKrupp (TKAG.DE) and Finland's Outokumpu (OUT1V.HE) are in early talks over a stainless steel tie-up, moving towards the long-awaited consolidation of a sector that has struggled to battle overcapacity and cheap Chinese imports.
ThyssenKrupp, a steelmaking conglomerate whose business stretches from submarines to lifts, is in the throes of a radical restructuring that will see it shed non-core assets with revenues of 10 billion euros ($12.7 billion) to slash debt.
The sale of all or part of Thyssen's stainless steel unit, renamed Inoxum, would mark a key step forward in the slimming down of Germany's largest steelmaker -- and would also provide welcome good news for its shareholders, still reeling from cost overruns that pushed the company into the red last year.
Outokumpu, itself battling losses, said in a statement on Monday that the two sides were evaluating "potential strategic options, including a potential business combination".
A spokesman for ThyssenKrupp, still officially considering all options for Inoxum, confirmed the company was in talks with its Finnish rival.
A deal to tie up two of Europe's largest players could be worth as much as 3 billion euros ($3.9 billion), creating a producer that could control more than 60 percent of the European market.
Analysts said it was not possible to precisely value a combined stainless entity without more detail on the shape of the potential tie-up, venture or sale, or on likely synergies. Most said the deal was unlikely to include all Thyssen's assets.
"I see it as some kind of fusion or joint venture, it is difficult to see that Outokumpu would buy (ThyssenKrupp's stainless arm), because the price tag would be around one to two billion euros and Outokumpu does not have means for that," Pohjola analyst Jari Raisanen said.
Outokumpu, which has fought spiraling losses by selling non-core assets, cutting costs and slashing one in six jobs, has long been seen as a natural partner for Thyssen, given its geographical spread of clients and products.
"They would strengthen each other as Outokumpu has own chrome mine and ferrochrome production..., which is an important raw material, while...Inoxum could improve Outokumpu's distribution in central Europe. And they have production offering that would somewhat complement each other," Raisanen said.
The stainless steel sector, which produces the metal used for everyday items like cutlery, nuts, bolts and surgical instruments, has been battling competition from Asia and the consequences of a global economic downturn.
ArcelorMittal ISPA.AS, the world's largest steelmaker, spun off its Aperam (APAM.AS) unit through an IPO last year.
Outokumpu shares soared over 12.6 percent by 1145 GMT to 7.6 euros, touch their highest levels since July. Thyssen was up 0.6 percent at 21.3 euros, marginally underperforming the sector.
Outokumpu and analysts cautioned that it was too early to be sure of success, as the two sides have talked before.
ThyssenKrupp and Outokumpu held informal discussions back in 2009. A Thyssen source later told Reuters that the steelmaker had balked at the idea of a strategic alliance that would have involved a significant writedown of some German assets. It has since, however, taken an 800 million euro writedown.
A full merger between Inoxum and Outokumpu would likely face significant antitrust concerns in Brussels. That could mean a subsequent sale of part of Thyssen's stainless assets, analysts said, possibly its coveted Terni operation in Italy, or including only some of Thyssen's assets in any venture.
"Only the German assets of ThyssenKrupp are likely to merge with Outokumpu," analyst Alexander Haissl at Cheuvreux said, arguing antitrust problems were unlikely to arise as a result, with capacity reductions and closures also seen after a tie-up.
Analysts have said any stainless deal would have to address the issue of excessive production in Europe, where the industry is operating at around 15 percent overcapacity.
A source on Thyssen's supervisory board said labor representatives on the board, however, would block any deal that did not provide long-term security of jobs at all factories.
"We want a long-term industrial concept that will secure the future of the manufacturing facilities. Otherwise we will not approve it," the source said.
Two people close to the talks told Reuters ThyssenKrupp was aiming for a complete sale of its stainless steel unit, valued at between 1 billion and 2 billion euros.
Additional reporting by Marilyn Gerlach and Alexander Huebner in Frankfurt, Jussi Rosendahl in Helsinki and Silvia Antonioli in London; Writing by Clara Ferreira-Marques and Maria Sheahan; Editing by Mark Potter, Hans-Juergen Peters and Jodie Ginsberg