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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 €12.4bn 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 head again.
One of the most interesting divisions up for sale is Thyssenkrupp’s highly profitable elevator division. Originally leading the pack for this sale was Finnish company Kone, who were reported to be in pole position with a deal worth a reported €17bn with the aid of private equity company CVC (FT – Jan 28 2020). Other private equity firms which had been discussed as potential buyers are now the most likely groups to complete the deal.
While the deal with Kone did originally look most likely, a sale to private equity firms was always in many ways the easiest and simplest option open to Thyssenkrupp because such a deal would face little anti-trust scrutiny comparatively, and so could be turned around quickly.
It is now being reported (Reuters – Feb 17 2020) that two private equity groups are proceeding to the final round of negotiations with Thyssenkrupp, hoping that the consortia will raise their bids above the roughly €16bn offered so far to acquire Thyssen’s most profitable business. The first group reportedly consists of Blackstone, Carlyle and the Canadian Pension Plan Investment Board, the other is led by Advent and Cinven.
Kone’s withdrawal from the potential deal could have a negative effect on the company who were hoping to tie up an industry rival, making themselves the biggest lift maker in the world. The short-term effect is that Kone’s stock dropped almost 7%. What the long-term effect will be depends on how much Kone were relying on the deal for their future business plans – potentially this could be a severe blow. Furthermore, a private equity led ex-Thyssenkrupp elevator division has the potential to make strong waves in the already tight elevator market.
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 $73.8bn which is about 27% of the total for Materials Handling Equipment. Our current forecast for the total Materials Handling Equipment market 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 rate of 7.2%. A slight up-turn is expected in 2020, with 3.4% growth predicted, however the uncertainties and fallout of this sale could have a significant impact on the short-term prospects of the industry.
- The much-discussed potential deal between Thyssenkrupp and Kone is now off the table, however, a deal with a private equity firm will likely have its own pitfalls
- The length and extent of this dampening period is still dependent on several factors including; the length of the transition period; how the winning private equity consortium decides to use the division it purchases (asset-stripping vs integration); and how well rival companies (Otis, Mitsubishi Electric, Schindler and now Kone) can take advantage of this situation
- In many ways, a sale to private equity firms is the easiest option for Thyssenkrupp, as it will face little to no anti-trust scrutiny comparative to that which would have been faced by a Kone deal – which would have always carried a strong potential to be blocked. Given the risk-averse climate we are currently experiencing, it is perhaps unsurprising that private equity looks like the option Thyssenkrupp will go with