October 30, 2018 / 5:00 PM / 16 days ago

UPDATE 2-EU's Thyssenkrupp, Tata Steel inquiry raises disposal expectations

* Combination would create Europe's No.2 steel group

* Move fuels expectations for asset sales

* Commission has until March 19, 2019, to decide

* Tata Steel shares down 1.9 percent (Recasts, adds Tata Steel comment, analyst, banking source)

By Christoph Steitz and Chris Thomas

FRANKFURT/BENGALURU, Oct 31 (Reuters) - By opening a deeper investigation into Thyssenkrupp's planned steel joint venture with Tata Steel, the European Commission (EC) raised expectations on Wednesday they will have to sell assets to win its approval.

Tata Steel shares fell by as much as 6.2 percent on Wednesday, with analysts pointing to potential delays to the deal, which would create Europe's second-largest steelmaker after ArcelorMittal.

Thyssenkrupp, whose shares were 3.3 percent higher at 18.725 euros at 1129 GMT, and Tata Steel plan to combine their steel activities in Germany, the Netherlands and Britain.

The EC's so-called Phase II investigation was widely expected and follows a similar probe into ArcelorMittal's takeover of Italy's Ilva, which was cleared only after a pledge to sell assets.

"Tata Steel has noted the EC's concerns and will continue its discussions with the EC including providing further information and analysis, especially in relation to sectors they have identified, to secure approval for the proposed joint venture," it said in a statement.

The Commission said it identified three areas where the combination of both companies' specialty flat carbon steel and electrical steel products could give them a dominant position: steel for the automotive sector, metallic coated steel for packaging and grain oriented electrical steel.

The automotive industry accounts for about 30 percent, or 4.7 billion euros ($5.33 billion), of the new company's sales, its biggest customer group.

"As soon as you exceed market share of 40 percent there is a good chance of remedy sales," said a banker specialising in industrials, who declined to be named.

Analysts expect few problems regarding crude steel production, where ratings agency Moody's reckons the venture will control just 14 percent of the European market, a distant second to ArcelorMittal's 29 percent.

But the new firm, to be named Thyssenkrupp Tata Steel, would own about 50 percent of the European packaging steel, or tinplate, market, a person familiar with the industry said.

Rasselstein, Thyssenkrupp's packaging steel unit, posted sales of 1.16 billion euros in the 2015/2016 fiscal year and employed about 2,400 workers.

Tata Steel's European unit has already put a number of assets on the block, including Cogent, a manufacturer and processor of electrical steels, and it is unclear whether these divestments would satisfy EU concerns.

The Commission now has 90 working days, until March 19, 2019, to investigate the matter and take a decision.

A spokeswoman for Thyssenkrupp said the deepened probe was expected and standard for a transaction of this size. ($1 = 0.8818 euros) (Additional reporting by Jan Strupczewski in Brussels; Editing by Francesco Guarascio/Douglas Busvine/Alexander Smith)

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