Thyssenkrupp huge lift division deal took buyout boom to the higher level
Thyssen + Krupp in the years 1999
It was in 1999 that Thyssen and Krupp had initiated this merger. But, twenty years later, the German conglomerate has prepared for a real “detryage” of the company. This restructuring was imposed with the backdrop of activist funds, Cevian and Elliott, as well as disappointing operational performance. In August, and for the fourth time, Thyssen-Krupp revised its annual operating profit objective: in short, € 800 million expected, versus € 1.2 billion previously forecast and € 1.4 billion achieved over the 2017-2018 fiscal year. It is therefore not surprising that asset disposals are on the agenda. Even if the form they take is not always very clear. To understand the contours of this program, you must go back a few months. In June, the European Commission rejected the proposed merger between the steel branch of Thyssen-Krupp and that of Tata Steel in Europe. The German industrialist was also abandoning its plan to split into two separate entities: on one side, Thyssen-Krupp Industrials (engineering, elevators, automotive parts) and on the other, Thyssen-Krupp Materials (materials trading, shipbuilding).
Damocles' sword remains anti-trust threat
To move forward, while its share price has been halved since January 2018, the Essen-based industrialist has put on the table the partial IPO of its “elevators” activity, which happens to be the most profitable of all. In early August, Thyssen-Krupp confirmed that the carve-out should be effective by the end of 2019. According to the financial press, Advent International, Cinven and Adia (Abu Dhabi Investment Authority) have formed a consortium, while EQT has withdrawn of the race. The German media, meanwhile, cited the names of Apollo, Carlyle, CVC and other KKRs. In any event, the financial sponsors were most likely to face trade buyers of the caliber of ONE (Finland) and Hitachi (Japan). The question is of course whether an "industrial" combination scenario would pass the test of anti-trust fire, knowing that Kone, Hitachi, Otis and Thyssen-Krupp share, roughly speaking, most of the elevator market in the world. If Kone were to acquire Thyssen-Krupp’s lift division, it would have become the world leader, with a market share of around 28%, ahead of Otis (20%) and Schindler (16%). Does this mean that a joint venture scheme could be studied?
Valuation at over 15 and up to 20 billion
What valuation could Thyssen-Krupp expect from the sale of its elevators? Analysts' estimated hovered around 15 billion (more) overall. But some of them report a potential value of around € 20bn, were including synergies of € 7bn that Kone could, for example, have expected. In addition, the conglomerate was studying "all strategic options" for three activities that it considers "unproductive". We’re talking about springs and stabilizers, system engineering and high-strength steel. In total, this scope represents around 4% of consolidated turnover, but generates negative cash flows. Thyssen-Krupp also confirmed that it would start, in 2020, the layoff of 6,000 jobs which it announced last spring. The situation (pre-health crisis) was already delicate, so after ...
A peak deal
The Advent & Cinven’s 17,2 billion leveraged purchase is hailed a success. The lift business was the company’s crown jewel. With this huge transaction (i.e. the second largest leveraged buyouts) we can notice the interest of large actors for mega deals. The group was obliged to dispose some assets to compensate lack of cash to fund pension liabilities. The group has brought in more than 17 billion EUR from a group led by Advent & Cinven in one of the Europe’s biggest ever buyout deals. The price far surpasses the figure the company was expecting and was done just before the peak in the corona virus crisis. What a great timing! But beside this, it reflects the buyout boom and throwback to pre-crisis years, when buyout groups teamed up and took on larger leveraged deals. In my opinion, it is a peak deal, which was above Blackstone and Carlyle best offer by 700 million. The deal’s total leverage, the ratio of its debt to its earnings is around eight times and fourteen times its adjusted earnings. One of the records one. Despite the crisis, it has a high customer retention and a defensive cash flow. Even in a downturn, safety regulations require companies to pay for their lifts to be serviced. The tipping point came last weeks when it announced it was prioritising the bids of two private equity consortiums and deprioritizing the offer from Kone. This mega deal will be financed in part with high-yield bonds and leveraged loans that equate to 6,9 times adjusted earnings. This is clearly at the top end of the leverage range that bond and loan fund managers find acceptable. Therefore, an expensive but interesting acquisition by PE’s. Good assets remain limited and when they appear, there are targeted by big players, at the expense of operating companies which are penalized by anti-trust measures and limited multiples they are ready to pay (as they fear goodwill impairments). I guess it won’t be the last one in 2020.
Fran?ois Masquelier, SimplyTreasury