Saturday , August 17 2019

German driver is hitting brakes, pulls epic U-turn

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 May 10 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 – 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. 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 realise 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.

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