German industrial giant Thyssenkrupp has been struggling significantly in recent months. CEO Martina Marz has had to take emergency measures due to several profit warnings and a reported €12.4 Billion in debt and pension liabilities (Reuters – Feb 4 2020). Among the measures taken are the scrapping of the group’s dividend, a plea for patience from investors and the selling off or consolidation of several divisions of the company.
Among the divisions on the chopping block are the company’s plant building division ‘Industrial Solutions’ which is responsible for building cement, fertiliser and chemical plants. ‘Industrial solutions’ is being floated as a possible sale with potential buyers being sounded out at the start of January. ThyssenKrupp’s steel division merger with Tata Steel was blocked last year by the EU’s competition watchdog and this is an issue which may rear its ugly head again.
One of the most interesting divisions up for sale is Thyssenkrupp’s highly profitable Elevator Division. Leading the pack for this sale is Finnish company Kone, who it is reported are in poll position with a deal worth a reported €17 Billion with the aid of private equity company CVC (FT – Jan 28 2020). Other private equity firms have been mooted as potential buyers, but current reporting says that Kone/CVC is the most likely group to complete the deal. However, the deal could run into similar problems as the Tata merger as there are issues with anti-trust laws and regulations which could block the deal or at the very least severely extend the takeover process.
There are several issues with any takeover and while Kone looks most likely, a sale to private equity firms would be easiest as it would face little to no anti-trust scrutiny comparatively and so could be turned around quickly. The Kone deal has a larger risk of long, costly scrutiny and the potential to be blocked, even though it has been reported that Kone are prepared for private equity firm CVC to take most of the European assets to allay fears of anti-trust violations. Dankse Bank believes a Thyssen-Kone merger would have a combined market share in excess of 40% in North America alone (Reuters – Feb 4 2020). Similar deals such as the Linde-Praxair merger took over a year and a half to get approval and could leave buyers and workers in limbo if the integration is handled poorly.
In the Interact Analysis Manufacturing Industry Output Tracker, the sub-category of ‘Elevators, Escalators and Lifts’ was the second biggest component of ‘Materials Handling Equipment’. In 2018 it had a production value of $73.8 Billion which is about 27% of the total for Materials Handling Equipment. Our current forecast for total Materials Handling Equipment is shown in Figure 1.
Based on available monthly indices, materials handling equipment is expected to have grown by 2.4% in 2019 much lower than the 2018 growth of 7.2%, with a slight up-turn expected in 2020 with a slightly higher growth of 3.4% predicted, however the uncertainties and fallout of this sale could have significant impact on the short term prospects of the industry .
- If a deal between KONE and Thyssenkrupp can be agreed, the size of the organisation would dominate the European and North American market for elevators, escalators and lifts. However, an extensive and costly integration may dampen market outlook in the short term.
- The length and extent of this dampening period is dependent on several factors including; Length of transition period; how KONE decides to use the division it purchases (asset-stripping vs integration); and how well can rival companies (Otis, Mitsubishi Electric, Schindler) take advantage of this situation.
- Kone recently stated it believed a merger would lead to “highly complementary geographical footprint of the businesses, substantial value creation on offer from synergies, and joint innovation potential in an operating environment increasingly shaped by digitalization.” (Financial Post – Jan 28 2020)