Project Peak Became One CEO’s Long Climb to Save a German Icon
(Bloomberg) -- Martina Merz had just managed to pull Thyssenkrupp AG from the brink, but the chief executive officer of the once-proud German engineering powerhouse wasn’t in a celebratory mood.
It was late Thursday afternoon in Essen, where Merz and other senior executives had sealed the sale of the elevator subsidiary after a drawn-out bidding battle. The business was offloaded to a group of investors backed by Advent International and Cinven for 17.2 billion euros ($18.9 billion), ranking as the biggest private-equity deal in Europe in a decade. Merz presented the final pitches to the supervisory board to select the winner.
When it was done, the team cracked open a few bottles of beer and soft drinks and watched the rain wash over the monumental company campus they had moved into about a decade ago, when Thyssenkrupp’s future seemed bright.
For the German industrial stalwart, this wasn’t a champagne-popping occasion. Rather, it drove home the sober point that while the deal throws the company a much-needed lifeline, it reduces Thyssenkrupp to a shadow of its former self. It’s also the likely prelude to more disposals to service a huge pension deficit and bulging debt. From that process will emerge a much smaller company occupying a too-large head office that serves as a memorial to a corporate implosion like no other in recent German history.
Thyssenkrupp’s negotiations to sell the business stretched out for months, with multiple suitors vying for the top prize. This story is based on interviews with participants in the bidding process, who spoke on condition of anonymity because the deliberations were private. Thyssenkrupp declined to comment.
Within Thyssenkrupp’s hodgepodge portfolio of submarines, automotive parts and heavy plated steel lies a crown jewel: the elevator business, among the largest in the world and a strong profit contributor thanks to its global footprint and service contracts that guarantee a steady earnings stream. Other top players are Kone Oyj of Finland, Schindler Holding AG in Switzerland and Otis in the U.S., which helped elevators to commercial success more than a century ago by inventing a safety device that prevents a lift from crashing down should the hoisting cables snap.
While Thyssenkrupp management was aware that it had to monetize the elevator asset, the shape of a sale remained less clear. Merz’s predecessor, Guido Kerkhoff, had favored only a partial disposal or a listing. When investors including Swedish activist fund Cevian Capital AB became impatient, Kerkoff was pushed out last year, and Merz assumed the top job.
The company she inherited was one in deep turmoil. The once mighty conglomerate, which forged the gleaming spire atop the Chrysler building, powered the Nazi war machine and exemplified Germany’s industrial rebirth after the war, had fallen on hard times. Investments in the U.S. turned sour, steel prices kept falling and the pension deficit rising. In September, Thyssenkrupp was booted from the DAX index of the 30 most important German companies.
The all-encompassing crisis forced Merz to confront some hard truths: to save the company, a wholesale disposal of the elevator business, among others, would be inevitable. And private-equity firms, long derided in Germany as locusts for their focus on profit-boosting cost cuts, would likely become the preferred new home for the asset.
Kone, the main European rival from Finland, showed early interest. The company teamed up with co-bidder CVC Capital Partners, facing off against three rival groups led by Blackstone Group Inc., Advent and Brookfield Asset Management Inc., as well as suitors from Asia and Brazil.
But inherent in Kone’s overture was one major hurdle that Thyssenkrupp management struggled to clear: even though the Finnish rival submitted the highest offer, it would lead to long-winded regulatory approval process, one that Thyssenkrupp with its back against the wall could ill afford.
Merz, the first woman to run the traditionally male-dominated company, hammered home that point at the annual general meeting on the last day of January, when she told shareholders that the company was in an “extremely difficult situation,” its balance sheet leaving her with no time to lose.
Two weeks later, Kone was out of the running, denying the Finnish company the opportunity to become the biggest elevator maker in the world by almost doubling its revenue. Even as Kone proclaimed that it was withdrawing from the process, the company made a last-attempt ditch to stay in the running by bringing in a strategic partner from Japan.
Merz pushed on with the remaining private-equity parties, which had already received the blessing of powerful labor unions by agreeing to job guarantees, pledging investments and maintaining the Thyssenkrupp brand. They also floated the prospect of turning the business into a DAX candidate several years down the line with an IPO.
The final stretch came down to price. By the afternoon of Feb. 26, the competing duo that remained -- Advent and Cinven on one side and Blackstone with Carlyle on the other -- had put in their best and final offers. Given the high stakes to keep the process private, the bids were delivered directly to Thyssenkrupp management and not, as is customary, via advisers.
Merz pored over the numbers and presented the two finalists to her fellow management-board members later the next day. The group concluded that they preferred the Advent-Cinven side, which edged out the other suitor by several hundreds of millions after pushing slightly more aggressive financing.
Less than two hours later, Merz decamped to one of the other dozen buildings on the Thyssenkrupp campus, which is dominated by a huge steel-and-glass cube made up of one L-shaped structure lying atop another. Armed with handouts and a power-point presentation, she faced the supervisory board at about 4 p.m. to make her pitch and lay out why the business should go to Advent and Cinven.
The supervisory board, which has the mandate of signing off on major strategic decisions, didn’t require much persuasion. Merz had remained in close touch with the group over the weeks, keeping the powerful panel in the loop on the process. Within less than two hours, the board signed off on her pick. As individual members dispersed, Merz and a small entourage stayed behind to nibble on some sandwiches and meatballs and wash them down with a quick drink.
Even before advisers to the bidders heard of the result, news of the winner began to trickle out. Bloomberg News first reported at 18:28 p.m that the Advent consortium had made the cut. About 51 minutes later, the company went public with the details.
And timing may prove to be on Thyssenkrupp’s side. With the coronavirus scare shaking markets around the globe, hurting corporate earnings and closing the window on IPOs, Thyssenkrupp was able to seal the record buyout just in the nick of time.
Cinven and Advent had picked Project Vertical as the codename for their bid, while Thyssenkrupp chose Project Peak. It’s a befitting label for the months-long uphill slog endured by Merz, who can now focus on a steadier path back into the foothills of corporate Germany to rescue what’s left of the once mighty Thyssenkrupp.
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