Thyssenkrupp’s Elevator Unit Set To Undergo 2020’s largest LBO

(Claudia Horsham)

Thyssenkrupp AG is selling its Elevator technology business, which is said to be the ‘crown jewel’ of the 20-year-old German conglomerate, to a consortium led by Advent, Cinven and RAG-Stiftung foundations for a purchase price of €17.2 billion. The motivation for the sale comes from the fact that the company is reeling from profit downgrades and has run out of cash to fund its pension liabilities. The buyout is the largest in Europe since 2007 with Thyssenkrupp Elevator being the world’s fourth largest lift manufacturer, following United Technologies Corps.


The deal comes at a time when Thyssenkrupp is seen to be struggling, with shares trading at the lowest level in thirteen years resulting from hapless investments, a downturn in the car market due to the coronavirus pandemic, and several leadership changes, all of which has led to the conglomerates relegation from a Dax blue-chip index. Shown in the chart below is the share price of Thyssenkrupp, which has been on a downward trend since January, trading at 13-year lows in March.

Source: Hargreaves Lansdown, https://www.hl.co.uk/shares/shares-search-results/t/thyssenkrupp-ag-npv

Germany’s most profitable business has accumulated an estimated €16 billion worth of debt and pension liabilities, which is more than double its market value, therefore the leveraged buyout is a call for desperation for a much-needed cash injection to prevent a complete disintegration for Thyssenkrupp. The sale of Thyssenkrupp’s elevator unit will raise hopes of regaining ‘financial solidity’ in the other troubled areas of the conglomerate, such as the steel unit, which is plagued with excess capacity and registered losses for up to €500 million in the six months since November (see chart below). Other struggling divisions are: marine systems; plant technology; and automotive technology which also made losses in the year to March. The chart below shows the revenue in FY 2018/2019 with the elevator technology division of Thyssenkrupp generating the third highest sales.

Data from Statista, Graph by Orchid

This cash inflow from the deal will remain within the business and will be used to reduce the financial debt Thyssenkrupp holds and strengthen the performance of its balance sheets through lowering structural costs. The German conglomerate will also use the proceeds from the deal to partially fund the pension obligations which shall be brought under a legally independent trust helping to reduce the cash outflow of recurrent interest and pension payments. Moreover, the cash injection will not solely be used to improve the portfolio of the remaining business, as Thyssenkrupp plans to reinvest €1.25 billion of the purchase price to hold a 7.3% share in the Elevator unit on the grounds of the agreed purchase price. This remaining share in Thyssenkrupp Elevator will also contribute towards funding its pension liabilities in the independent trust.

The deal, which could be the world’s largest buyout this year, values Thyssenkrupp Elevator at approximately 18 times its core earnings. Moreover, Thyssenkrupp is currently rated ‘junk’ by credit rating agencies (that is BB- or B1) with ThyssenKrupp’s elevator unit appointed a B2 of B rating and a B1 or B rating to the senior secured debt, four notches below investment grade. Following the deal, the multinational conglomerate intends to focus on industrial engineering and steel production and has set its sight on an investment grade rating (that is Baa3 or BBB- and higher) and a stronger equity base. A stronger equity base will allow for Thyssenkrupp to recoup the capacity to payout dividends on a regular basis. Free cash flow is also to be improved within the two years upon closing the deal.

Bonds and loans are to be issued to contribute towards funding the buyout of Thyssenkrupp Elevator by Advent International Corp, Cinven Ltd, and RAG-Stiftung. The total syndicated debt is estimated to be €7.1 billion euros, which is one of the largest offerings in the European leveraged-finance market this year with the latest bond offering being denominated in euros and U.S. dollars. The latest issuance comprises €3 billion of equivalent in senior-secured bonds and €1.05 billion in unsecured notes. The deal’s ratio of debt to earnings (or total leverage) is approximately 8, one of the highest ratios on a European private equity buyout in several years. Furthermore, the private equity group plans to fund the majority of the acquisition through debt but in addition to debt, will use €7 billion in equity to help fund the deal.

The decision to put an end to the group’s integrated structure and accelerate the breakdown of Thyssenkrupp into 5 core businesses (materials, components, car parts, ship building, steel) was not put on hold as a result of the pandemic. Despite coronavirus contributing to the conglomerate’s soaring debt, the private equity group sees Thyssenkrupp Elevator as relatively ‘recession-proof’ due to its longstanding contracts servicing lifts. Lifts were still being serviced during lockdown and customers are said to have high retention rates as safety regulations require that companies service lifts regularly. Similarly, even though new construction projects may be put on hold, the business can grow through acquiring small elevator servicing businesses and takeover contracts run by rivals in the industry such as Kone in maintaining lifts. Finally, despite all this, Cinven and Advent are said to be rounding up more equity investors to avoid being left with too big a stake, as this could trouble the funds’ performance and result in less money for potential deals in the future.

Definitions

Equity base= If a company has a class of common equity securities listed on a National Securities exchange, the sum of the value of all outstanding Common Units plus the liquidation preference of all outstanding preferred Partnership Units. If the company does not have a class of common equity securities listed on a national securities exchange, the net worth of the partnership.

Free cash flow= FCF represents the amount of cash generated by a business, after accounting for reinvestment in non-current capital assets by the company. The FCF Formula is equal to Cash from Operations minus Capital Expenditures. This figure is also referred to as Free Cash Flow to Equity or Free Cash Flow to the Firm.

Senior debt= debt that takes priority over other unsecured or more ‘junior’ debt owed by the issuer. It is the borrowed money that the company must repay first if it goes out of business. 

References

Bloomberg (2020) Thyssenkrupp Elevator Buyout Seeks Additional $4.6 billion Debt [online]. Available from https://www.bloomberg.com/news/articles/2020-06-24/thyssenkrupp-elevator-buyout-seeks-additional-4-6-billion-debt; [Accessed 18 July 2020].

Financial Times (2020) Thyssenkrupp turns tables in private equity megadeal [online]. Available from https://www.ft.com/content/3199511c-5ec8-11ea-b0ab-339c2307bcd4; [Accessed 18 July 2020].

Financial Times (2020) Thyssenkrupp to shrink radically in drive to survive [online]. Available from https://www.ft.com/content/eca71153-0514-402c-b32d-acb4f0584879; [Accessed 18 July 2020].

Financial Times (2020) Cinven fears being stuck with a big stake in Thyssenkrupp lift business [online]. Available from https://www.ft.com/content/df7c876c-8fb1-4dbc-9662-dab162970f24; [Accessed 18 July 2020].

Hargreaves Lansdown (2020) Thyssenkrupp Ag Share Price [online]. Available from https://www.hl.co.uk/shares/shares-search-results/t/thyssenkrupp-ag-npv ; [Accessed 18 July 2020].

Reuters (2020) Thyssenkrupp sells elevator unit for $18.7 billion to Advent, Cinven Consortium [online]. Available from https://uk.reuters.com/article/uk-thyssenkrupp-m-a-privateequity/thyssenkrupp-sells-elevator-unit-for-18-7-billion-to-advent-cinven-consortium-idUKKCN20L2QX ; [Accessed 18 July 2020].

Statista (2020) ThyssenKrupp’s sales in FY 2018/19, by main segment [online]. Available from https://www.statista.com/statistics/271782/revenue-of-the-conglomerate-thyssenkrupp-by-segment/ ; [Accessed 20 July 2020].

Thyssenkrupp (2020) Thyssenkrupp sells Elevator Technology business for €17.2 billion to consortium of bidders led by Advent, Cinven and RAG foundation [online]. Available from https://www.thyssenkrupp.com/en/newsroom/press-releases/thyssenkrupp-sells-elevator-technology-business-for–17-2-billion-to-consortium-of-bidders-led-by-advent–cinven-and-rag-foundation-19840.html ; [Accessed 18 July 2020].


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