Economic uncertainty, patchy results last year, and the prospect of cartel fines suggest this year's planned breakup of ThyssenKrupp will be far from easy.
Last year was an annus horribilis for the German industrial icon, thanks to two profit warnings, an exodus of executives and the departure of both its CEO and supervisory board chairman, after shareholders criticized the slow pace of restructuring, and the deal to merge the steel unit with India’s Tata Steel.
Management turmoil dampened hopes of progress but new CEO Guido Kerkhoff is forging ahead with a plan to separate ThyssenKrupp into two, with its elevators, car parts and plant engineering businesses separated from its steel, naval vessels and metals-distribution units.
“We’re building two strong companies that will be much more focused, with clear strengths in their respective businesses,” Kerkhoff told Handelsblatt in an interview.
Shareholders will give their final blessing to the plan in 12 months, when it will be put to the vote in an annual general meeting. Kerkhoff, however, aims to get the bulk of the break-up done this year.
The management structure of the two new companies, ThyssenKrupp Industrials and ThyssenKrupp Materials, will be unveiled in the spring, followed in May by the financial arrangements. The legal separation is scheduled for October.
Shareholders expect more
Which of the two new ThyssenKrupps Kerkhoff will end up managing remains to be seen. The majority of the 160,000 workers will be employed by ThyssenKrupp Industrials. Experts say that unit has a better chance of being included in the blue-chip DAX index. What Kerkhoff most wants is clarity, and quickly. “Our breakup will probably be the fastest in the history of German companies,” he said.
In the meantime, investors will be paying closer attention to ThyssenKrupp’s interim reports.
So far, the board, which will grow in February with former Bayer executive Johannes Dietsch as CFO, has only given profitability targets for the 2020/2021 fiscal year.
ThyssenKrupp needs to come up with the cash for its split well before that. The division will cost €800 million, with much of it for tax payments and consultancy fees.
The group made a net profit of just €60 million ($69 million) in the 2017/18 year to end-September, disappointing shareholders. They expect more of a company that generated €42.8 billion in revenue.
Kerkhoff admitted more effort is needed to make Thyssen's businesses more profitable.
Sunk by Turkish submarines
ThyssenKrupp’s investors, recently joined by US investment fund Harris and the Government of Singapore Investment Corporation, will listen eagerly to the board’s business plans for this current fiscal year, to be presented at Friday’s annual general meeting.
Kerkhoff wants the plant-engineering and elevator businesses to focus more heavily on service contracts. These have higher margins and more stable returns. He has big goals: Service revenue is to grow 4 percent per year in elevators and up to 12 percent in plant engineering.
Luckily, elevators are healthy, and the steel division also delivered earnings in line with its peers. Analysts are upbeat about the merger with Tata Steel, although it’s yet to receive EU cartel approval. Materials Solutions was considerably less impressive, though, and the components business, comprising car parts and large diameter rings, also performed less impressively.
Industrial Solutions, the plant engineering and naval vessels division, is a bigger concern, chalking up an operating loss of €243 million, partly due to losses on a Turkish submarine contract.
Weak earnings aren’t the only issue. The group has had to set aside risk provisions for a possible fine in an investigation into allegations that its steel division was involved in price-fixing.
The company’s liquid assets of around €3 billion are sufficient to cover the costs of its separation. But things could get tight if the economy cools in the coming months. Kerkhoff has sought to calm investor concerns by pointing out that including available credit lines, the group has liquidity of more than €7 billion.
He added that despite a noticeable deceleration in the auto industry, there were no signs of a recession yet. “So far we see continued growth, albeit with a declining momentum,” he said.
Sweetening the pill
Kerkhoff faces a further potential headache in the form of activist investors such as Swedish investment fund Cevian and Elliott, a US hedge fund. It’s still unclear how they will respond to Thyssen's split. Elliott sent Kerkhoff a letter in December expressing “doubts” about the move — but appears ready to give him time to solve the most pressing problems.
Perhaps in an attempt to sweeten the pill, the company is paying a generous dividend of €0.15 per share — the same as last year. That’s a big sacrifice as the total dividend payout of €93 million far exceeds ThyssenKrupp’s profit.
“Purely financially speaking, we could have gone without it,” Kerkhoff said. “But we aim to continuously generate a return for our shareholders.”
Martin Murphy covers industry for Handelsblatt. Kevin Knitterscheidt covers steel and machinery. David Crossland and Jean-Michel Hauteville adapted this story into English for Handelsblatt Today. To contact the authors: [email protected] and [email protected]