ThyssenKrupp Split No Longer Taboo as Cevian In: Real M&A

A breakup of ThyssenKrupp AG -- an idea long-resisted by its biggest shareholder -- is starting to look more realistic after activist investor Cevian Capital AB increased its stake in the German conglomerate.

Swedish investment firm Cevian disclosed its higher stake in September and is now ThyssenKrupp’s second-biggest owner. The stock has gained 11 percent since then on optimism the firm may push for measures such as a breakup of the $13.5 billion company, whose operations range from steel-making to elevator systems and bearings for wind turbines. Commerzbank AG says the company would be better off separating its major businesses, and the average of four analysts’ sum-of-the-parts estimates indicates a potential return for shareholders of 30 percent.

“A breakup is conceivable,” said Joerg Schneider, a money manager at Union Investment, which oversees about 200 billion euros ($270 billion), including ThyssenKrupp shares. “Activist shareholders can set quite a few things in motion. Suddenly things become possible that were considered very improbable,” he said in a phone interview from Frankfurt.

ThyssenKrupp, whose biggest shareholder the Krupp foundation has a blocking stake, is projected to report a third straight annual net loss next month amid unprofitable steel investments in the Americas and bribery and price-fixing scandals. Even after trimming costs and streamlining operations, including putting the American steel business up for sale, it commands a lower valuation than 92 percent of peers, according to data compiled by Bloomberg. While the Krupp foundation has vowed to keep the company together, Bankhaus Lampe KG says in time even it will probably back a breakup, too.

‘Makes Sense’

“A split-up makes sense long term because the industrial division is growing faster and is more profitable than the cyclical steel division. That would be the right way,” Marc Gabriel, an analyst at Bankhaus Lampe, said in a phone interview from Dusseldorf. “I don’t expect resistance from shareholders,” including the Krupp foundation, he said.

Robin Zimmermann, a spokesman at Essen, Germany-based ThyssenKrupp, declined to comment on the possibility of an eventual breakup.

ThyssenKrupp was formed in 1999 from the merger of Thyssen AG and Fried. Krupp AG Hoesch-Krupp. Its largest shareholder, the Alfried Krupp von Bohlen und Halbach Foundation, holds a 25.3 percent stake, according to regulatory filings, and has veto power over any major decision.

A representative for the Krupp foundation declined to comment when asked whether the foundation would support a possible splitup of ThyssenKrupp.

Writedowns, Fines

Germany’s biggest steelmaker, ThyssenKrupp has been hurt by a succession of steel-related writedowns and corruption probes that resulted in three executive board members being ousted in December as well as antitrust fines. In March, Gerhard Cromme, its chairman since 2001, resigned. ThyssenKrupp said today it agreed with Deutsche Bahn AG on the payment of compensation for price collusion in the sale of railway tracks and sees no further costs beyond already recognized provisions.

ThyssenKrupp, which didn’t pay its latest annual dividend, has lost almost 60 percent in market value from its peak in 2008.

Chief Executive Officer Heinrich Hiesinger, appointed in January 2011, is seeking to fortify the company by expanding its non-steel business and selling assets, including unprofitable plants in Alabama and Brazil’s Rio de Janeiro state. Hiesinger sold the company’s Inoxum stainless-steel unit in December.

Sale Talks

“The disposal of Inoxum has demonstrated that the company is prepared to break with tradition,” Sven Diermeier, an analyst at Independent Research GmbH, said in a phone interview from Frankfurt.

ThyssenKrupp is in talks to sell its Alabama plant to ArcelorMittal, the world’s biggest steelmaker, and Japan’s Nippon Steel & Sumitomo Metal Corp. (5401), who teamed up for their offer, according to two people familiar with the matter. The companies aim to reach an agreement in the coming weeks, though talks could still fall apart, said the people, who asked not to be identified because negotiations are private.

ThyssenKrupp fell 1.6 percent today to 19.09 euros, making it the biggest decliner among stocks in the benchmark DAX Index.

Cevian Stake

The company said yesterday that it was in exclusive talks on the sale of the Alabama plant and a related slab supply contract, without providing further details. Representatives for ThyssenKrupp and ArcelorMittal (MT) declined to comment on a possible transaction. Tsuyoshi Yoshizumi, a Tokyo-based spokesman at Nippon Steel & Sumitomo Metal, also declined to comment.

Cevian disclosed Sept. 25 that it raised its holdings in ThyssenKrupp to 5.2 percent, fueling optimism that greater participation will spur restructuring. The Swedish firm has since increased its stake and is now ThyssenKrupp’s second-largest shareholder with a 6.1 percent holding, according to data compiled by Bloomberg.

In September, Jens Tischendorf, a partner at Cevian, said in a statement that it backed the strategy of ThyssenKrupp’s management and sees “significant potential for the development” of the company.

Roland Klein, a spokesman for Cevian at CNC Communications, reiterated yesterday that the firm supports management, and declined to comment on a possible breakup.

‘Good Record’

“Cevian Capital has a very good track record in Germany and enforced changes at equity holdings that increased value,” Ingo-Martin Schachel, an analyst at Commerzbank, said in a phone interview from Frankfurt. “That can also be helpful for the other ThyssenKrupp shareholders.”

Even after gaining since Cevian disclosed its increased stake, ThyssenKrupp’s enterprise value is just 6.3 times its earnings before interest, taxes, depreciation and amortization in the past 12 months, according to data compiled by Bloomberg. That compares with a median of about 11 times for steel producers and industrial companies with market values larger than $5 billion, the data show.

Based on the sum of its parts, ThyssenKrupp should be valued at about 25.2 euros a share, according to the average of four analysts’ estimates compiled by Bloomberg, compared with yesterday’s closing price of 19.4 euros. The lowest estimate at 21.93, from Bankhaus Lampe’s Gabriel, still values ThyssenKrupp 13 percent higher than yesterday’s close.

Elevator Upside

The company would be better positioned without its steel and materials services units so it could focus on its technologies businesses, Independent Research’s Diermeier said.

“A spinoff, possibly combined with a partial IPO, could open the way,” while allowing the Krupp foundation to maintain its investment, Diermeier said. A breakup “won’t happen fast because political opposition must be expected and it makes sense to wait for the effect of the restructuring.”

Commerzbank’s Schachel estimates ThyssenKrupp’s value at as much as 30 euros a share in a breakup. He said the elevator technology business alone could be worth as much as 12 billion euros to a buyer that can exploit synergies to keep costs down. That’s more than ThyssenKrupp’s current market value of about 10 billion euros.

For each of ThyssenKrupp’s business units, there’s a conceivable partner, and that opens a wide range of possibilities, said Christian Obst, an analyst at Baader Bank AG who estimates ThyssenKrupp is worth 25 euros a share based on the sum of its parts. Even so, a transaction may be difficult because of issues such as more than 7 billion euros of pension and similar liabilities.

Gaining Traction?

A split-up of ThyssenKrupp may not be attractive for shareholders, in part, because the steel operations are “extremely volatile,” Hans-Peter Wodniok, an analyst at Fairesearch GmbH, said in a phone interview from Kronberg near Frankfurt.

Union Investment’s Schneider said ThyssenKrupp’s sum-of-the-parts value isn’t significantly higher than its current price. While a breakup is conceivable, it would likely meet with resistance from staff as well as politicians seeking to keep the German company together, he said.

Before considering any breakup moves, ThyssenKrupp needs to focus on its restructuring efforts, improve its free cash flow and repair its balance sheet, Alessandro Abate, an analyst at JPMorgan Chase & Co., wrote in an Oct. 29 report.

Even so, Abate said a split into two pieces -- capital goods and materials -- is conceivable in two years’ time and the two entities could have a combined worth of more than 35 euros a share.

A break-up scenario “may gain traction if Cevian further increases its stake,” he wrote.

To contact the reporter on this story: Tino Andresen in Dusseldorf at tandresen1@bloomberg.net

To contact the editors responsible for this story: Sarah Rabil at srabil@bloomberg.net; Will Kennedy at wkennedy3@bloomberg.net

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