German Driver Hits Brakes, Pulls Epic U-Turn

(Bloomberg Opinion) -- Breaking up an indebted German conglomerate was never going to be easy, but ThyssenKrupp AG boss Guido Kerkhoff probably hoped an enduring share price bounce would help smooth the process.

Instead, ThyssenKrupp’s stock tumbled about 45 percent since he announced a plan to split the company’s steel and capital goods activities in September.

The shares touched a 15-year low this week, delighting short-sellers but likely nobody else. That vote of no-confidence has now consigned the break-up plan to the dustbin.

On Friday shareholders cheered news that the split will be abandoned and that ThyssenKrupp will instead consider a listing of its prized asset – the elevators business. 

While this is a sensible step, management credibility has been severely dented by this huge strategic U-turn. The fact that the European Commission is also now expected to block a proposed steel merger with Tata Steel just compounds the sense of drift and embarrassment. The revised forecast of a full year net loss for the fiscal year to September – analysts had anticipated a profit of 500 million euros ($561 million) – underscores just what a pickle ThyssenKrupp remains in.

The German group’s problem has always been its weak balance sheet, sub-par profitability and inability to generate decent cash flow.

German Driver Hits Brakes, Pulls Epic U-Turn

Though separating the steel and capital goods businesses had merit in terms of giving them more strategic focus, both companies needed an adequate equity cushion and credit rating.

ThyssenKrupp’s cross-holding solution would have seen the materials business hold a minority stake in the capital goods company. While that was always a bit of a fudge, the share price decline seems to have made it unworkable.

That wasn’t the only problem with Kerkhoff’s proposals. The plan to split was expected to land ThyssenKrupp with a tax bill of roughly 1 billion euros, plus one-off administrative costs.

The economic environment hasn’t helped either. Steel markets have been buffeted by tariffs, while automakers that purchase ThyssenKrupp’s components are tightening their belts.

Even before today analysts expected the company to burn more than 700 million euros of cash in the financial year to September – a level the company could ill afford.

Without the steel joint venture with Tata, ThyssenKrupp won’t now benefit from its share of a projected 450 million euros of synergies, nor will it realize the expected book equity gains from doing that deal. Billions of euros of pension liabilities will have to remain with the parent, too.

The company will therefore need to find other ways to shore up its balance sheet, and an IPO of the elevators business isn’t a bad way to do that.

The unit generated almost 900 million euros of earnings before interest, taxation, depreciation and amortization last year – almost half the group total.

Though it is less profitable than European rival Kone Oyj, as a standalone company ThyssenKrupp’s elevator business might still be worth almost double the current group market capitalization of 8.3 billion euros. Besides bringing in much-needed cash, a separation might also pave the way for a merger with a rival such as Kone, which would create significant synergies and therefore shareholder value. 

Of course, a merger in the already fairly consolidated elevator market might draw scrutiny from anti-trust officials, and ThyssenKrupp will not want a repeat of the wasted effort it put into the steel joint venture. Still, the company doesn’t have many trump cards left. It’s wise to play this one.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Chris Bryant is a Bloomberg Opinion columnist covering industrial companies. He previously worked for the Financial Times.

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