BSCM would like to thank FactSet for providing charts and data. The FactSet platform has been extremely useful in all the stages of the draft of this analysis.
In the last few years, the German conglomerate ThyssenKrupp, one of the biggest steel producers in Europe, has been struggling both operationally and financially due to a total of almost $15bn in debt (with a Debt/Equity Ratio of more than 6, twenty-fold higher than the global Industrial average) worsened by huge pension liabilities, low margins and a general decrease in the EU economic activity.
Former CEO Guido Kerkhoff’s initial plan was to sell only a minority stake of the Elevator division (one of the most profitable) to private investors or listing it through a spin off. In the second quarter of 2019 talks with Finland’s Kone emerged for a probable all-cash bid, which eventually didn’t go through also for a potential regulatory risk.
Things changed after Kerkhoff’s was replaced at the end of the year, with the appointment of Martina Merz. The restructuring process of the whole conglomerate intensified since then, and the elevator division has lured many private equity giants, among which two consortiums: one made of Singapore’s Temasek and Brookfield, the other including Schwarzman’s Blackstone, Carlyle and the biggest Canadian pension fund.
The initial offer (by an undisclosed bidder) came in at more than $15bn, but the purchasing agreement was signed only after an eye-popping $18.7bn (€17.2bn) bid by a third consortium led by Advent, Cinven and RAG Foundation.
Although the transaction is still dependent on regulatory approval, the closing is expected by the end of fiscal year 2020, which is in October.
A group of banks led by Goldman Sachs is expected to lead the debt financing providing more than $10bn of loans, most of which as funded debt (denominated both in Euros and Dollars). According to Reuters, the unfunded debt comprises $1.3bn of guarantee facilities and a €560m revolving credit. Based on these figures, the deal is highly leveraged, considering an EBITDA for the whole ThyssenKrupp group (not only for the Elevator division) of $1.3bn in 2019.
The Thyssenkrupp Elevator Unit Business
Thyssenkrupp AG is a Germany-based diversified industrial company. Its business operations are organized in six business areas: Components Technology, Elevator Technology, Industrial Solutions, Materials Services, Steel Europe and since last year Marine Systems
The lifts and escalators business is the company’s crown jewel. It designs and delivers innovative passenger transportation solutions. The business unit deals with a wide range of activities as manufacturing the products, installing them, modernize and innovate to find new solutions, and maintenance. Thyssenkrupp Elevator serves customers worldwide. The company’s main products are: passenger and freight elevators, escalators and moving walks, passenger boarding bridges, stair and platform lifts.
The Elevator Business employs more than 50,000 people and generated €8bn in sales last year, which was almost the 20% of the net sales of the entire Thyssenkrupp Group.
In the last few years, the German conglomerate ThyssenKrupp, one of the biggest steel producers in Europe, has been struggling both operationally and financially due to a total of almost $15bn in debt (with a Debt/Equity Ratio of more than 6, twenty-fold higher than the global Industrial average) worsened by huge pension liabilities, low margins and a general decrease in the EU economic activity.
Former CEO Guido Kerkhoff’s initial plan was to sell only a minority stake of the Elevator division (one of the most profitable) to private investors or listing it through a spin off. In the second quarter of 2019 talks with Finland’s Kone emerged for a probable all-cash bid, which eventually didn’t go through also for a potential regulatory risk.
Things changed after Kerkhoff’s was replaced at the end of the year, with the appointment of Martina Merz. The restructuring process of the whole conglomerate intensified since then, and the elevator division has lured many private equity giants, among which two consortiums: one made of Singapore’s Temasek and Brookfield, the other including Schwarzman’s Blackstone, Carlyle and the biggest Canadian pension fund.
The initial offer (by an undisclosed bidder) came in at more than $15bn, but the purchasing agreement was signed only after an eye-popping $18.7bn (€17.2bn) bid by a third consortium led by Advent, Cinven and RAG Foundation.
Although the transaction is still dependent on regulatory approval, the closing is expected by the end of fiscal year 2020, which is in October.
A group of banks led by Goldman Sachs is expected to lead the debt financing providing more than $10bn of loans, most of which as funded debt (denominated both in Euros and Dollars). According to Reuters, the unfunded debt comprises $1.3bn of guarantee facilities and a €560m revolving credit. Based on these figures, the deal is highly leveraged, considering an EBITDA for the whole ThyssenKrupp group (not only for the Elevator division) of $1.3bn in 2019.
The Thyssenkrupp Elevator Unit Business
Thyssenkrupp AG is a Germany-based diversified industrial company. Its business operations are organized in six business areas: Components Technology, Elevator Technology, Industrial Solutions, Materials Services, Steel Europe and since last year Marine Systems
The lifts and escalators business is the company’s crown jewel. It designs and delivers innovative passenger transportation solutions. The business unit deals with a wide range of activities as manufacturing the products, installing them, modernize and innovate to find new solutions, and maintenance. Thyssenkrupp Elevator serves customers worldwide. The company’s main products are: passenger and freight elevators, escalators and moving walks, passenger boarding bridges, stair and platform lifts.
The Elevator Business employs more than 50,000 people and generated €8bn in sales last year, which was almost the 20% of the net sales of the entire Thyssenkrupp Group.
In 2019, order intake in the business area reached a new high of €8.2bn. The Asia-Pacific and Europe regions contributed in particular to this: in addition to several major metro projects in China and another in Sydney – the largest order to date in Australia with more than 200 units sold – major projects in Russia and Turkey also had a positive impact on business.
Last year the Adjusted EBIT improved by €42m with respect to 2018, reaching €907m, while the entire Thyssenkrupp Group had an Adjusted EBIT of €802m meaning that other business units had lowered the Adjusted EBIT produced by the Elevator Unit.
The Buyers
The winning offer was made by the consortium of private equity firms Advent and Cinven with RAG-Stiftung, with the legal help of NautaDutilh and Kirkland & Ellis.
Advent International is a Boston-based private equity firm focused on buyouts and growth equity investments in healthcare, technology, consumer retail, business and financial services and industrial. It has invested in over 350 companies across 41 countries since 1989 and currently has €54bn of assets under management. It was established in Germany in 1991 and has advised on more than 30 deals in the country since.
Cinven is a British private equity firm focused on European deals in technology, healthcare, business and financial services and industrial manufacturing. It currently has a portfolio of 26 companies and has raised around €37 billion. It currently has around €20bn of assets under management. The typical investment period is of four to five years and is present in Germany since 1999.
RAG-Stiftung (in English “the RAG Foundation”) is a public-sector trust established in 2007, after the federal government decision to discontinue hard-coal mining in the country. It was financed by Germany’s biggest coal mining corporation (RAG) after its restructuring in 2007 that led to the creation of Evonik Industries, Germany’s second largest chemical company, listed in 2018 in Frankfurt and now held at 58.9% by the RAG Foundation. In addition, it is guaranteed by the federal and regional government, which will supply funds if needed.Germany’s coal industry was located mostly in the north west region of the Ruhr, where also Thyssenkrupp steel business was born and headquartered.
Both Advent and Cinven have a long-standing experience in Germany, where they have been present for more than twenty years and have invested in more than 39 companies. Moreover, they have a considerable experience in the industrial and industrial and business services sectors and a history of dealing with German industrial companies. The RAG Foundation would benefit from the steady source of returns given by ThyssenKrupp elevator business and would focus on preserving the jobs and heritage of the company in the region of Ruhr.
Deal Rationale
Advent, Cinven and RAG-Stiftung agreed to pay an eye-watering sum of €17.2bn to buy the elevator division of ThyssenKrupp, regarded as the crown jewel of the group. The sold entity provides for 20% of group’s total revenues but it is the most profitable division and plays a key role in keeping alive other sinking businesses. However, the deal, given a price tag above the most optimistic forecasts, will be beneficial to the seller, currently facing problems due to mounting financial instability and market unappreciation.
The proceeds will remain in the company and will contribute to the group restructuring.
Part of the €17.2bn will be devoted to liabilities’ repayment, given that debt and pension obligations are €16bn (more than twice ThyssenKrupp pre-deal market value). Debt reduction will lower interest expenses, thus improving cash flows, while company executives are hoping for a credit upgrade from junk to investment grade. This balance sheet enhancement is expected to completely counterbalance the loss of future positive cash flows from the elevator business.
With its regained financial solidity, ThyssenKrupp will have greater scope to implement its transformation. The primary goal is a rapid and substantial restructuring of other business units to improve the competitiveness of the company.
Overall analysts expects structural costs to fall nearly $1bn per year.
Moreover, the consortium’s good relationships with powerful German labor unions, together with investors’ successful track record in Germany, give ThyssenKrupp a further assurance on the deal going through smoothly, without any intervention by the regulator.
Despite the incredible price paid, expressing a multiple of 14 times adjusted earnings, the predominant opinion is that the consortium made a good deal. From the investors’ perspective two main drivers of value can be envisioned.
The first is given by the nature of the business operated by the elevator division, with a major part of revenues (roughly 50%) being recurring, resulting from longstanding servicing contracts. This steady source of income provides hedge against market downturns, making thus the company highly valuable in the current market turmoil.
The second driver is the possibility to invest new funds in the development of the division which, despite its good profitability, has surely suffered from the capital shortage of its previous holder.
Through new investments the buyer could also align already good margins (EBITDA margin around 10%) with those of ThyssenKrupp Elevator’s main competitors (Otis, Kone and Schindler report a 13/14% margin). Funds can also be allocated to increase the company presence in fast growing markets like Asia and in R&D to develop new energy efficient products.
Besides, other companies in the same sector could be bought and added-on, creating a European champion in a fragmented industry.
Finally, when analyzing this deal and the large sum paid, we have to take into consideration current private equity market conditions, characterized by a huge amount of dry powder ($1500bn at the beginning of 2020), funds already committed that urge to be invested. For this reason, the large amount of funds deployed can be seen as a way to access a (probably) rewarding investment, at a time in which fund end is approaching, increasing the risk of being forced to “randomly” invest or, even worse, to return funds to investors.
As last remark we would like to point out that the recent Corona virus crisis and the subsequent economic recession are likely to hardly hit the financial industry. In particular, for several months if not years, it will be extremely difficult for PE funds to access to big debt facilities at such favorable terms as in the case described in this article.
As a consequence we see consistent chances for the deal to be slightly changed to adapt to the different market environment (of course the magnitude of changes depends on contractual provisions which are not easily accessible and cannot be discussed extensively).
EMEA TEAM (Lorenzo Monticone, Sofiya Sergeeva, Remogiulio Cavuto, Francesco Curioni, Carlo Geat, Daniele Notarnicola)
Want to keep up with our most recent articles? Subscribe to our weekly newsletter here