Insight: Turmoil at Thyssenkrupp marks battle for Germany's economic identity

NSK

17/05/2019 12:01

* Elevators IPO plan breaks with long company tradition
    * Ignites battle over Thyssenkrupp's future direction
    * Activist investors pushing to simplify conglomerate
    * Clash of cultures could test German model of capitalism 

    By Christoph Steitz, Tom Käckenhoff, Edward Taylor and Arno
Schuetze
    FRANKFURT, May 17 (Reuters) - When Thyssenkrupp  TKAG.DE 
CEO Guido Kerkhoff announced plans to list its prized elevators
unit last week, he set off a battle for the conglomerate's
future that could test Germany's brand of "social market"
capitalism.
    Kerkhoff had little choice but to think the unthinkable when
the company's share price sank to a 15-year low on May 8. The
plan to take elevators public not only broke with long tradition
but marked the abandonment of a turnaround plan he himself had
unveiled less than eight months before.
    Now Thyssenkrupp's future is in play, with activist
investors on the one side baying for a restructuring of the
group to drive up value, and its top shareholder - the
charitable Krupp foundation - and workers on the other side with
a mandate to protect the unity of the company and jobs.
    It's also a clash of cultures and of differing visions of
capitalism: Anglo-Saxon profit maximisation pitted against
Germany's long-term focused social market economy model.
    Kerkhoff's strategy will not only decide the fate of his
career, but also the shape of Thyssenkrupp - a poster child of
Germany's so-called Rhineland capitalism, which buttressed the
country's economic success by emphasising social policies to
protect workers rights as much as the rules of free enterprise.
    Thyssenkrupp's conglomerate structure has fallen out of
favour in the market, reflected in the deterioration of its
share price. Many investors say Kerkhoff and the non-profit
foundation must move to reshape the group's portfolio, including
through spin-offs and divestments.
    Ingo Speich, head of sustainability and corporate governance
at top-20 shareholder Deka Investment, said this kind of active
portfolio management was the likeliest and best solution for the
group.
    "Parts will be separated out and the resulting proceeds used
to make acquisitions."
    Bankers and investors are now eyeing the prospect of finding
new owners for the group's sprawling businesses, ranging from
steel and elevators to car parts and submarines.
    Components Technology, which makes automotive parts, and
Industrial Solutions, which makes chemical and cement plants,
may be merged with sector peers in the medium to long-term,
according to three financial sources familiar with the matter.
    Elevators may end up in the hands of Kone  KNEBV.HE  or
Schindler  SCHP.S , should they intercept Thyssenkrupp's IPO
plans, while plant engineering could be combined with Linde's
 LIN.N   LINI.DE  engineering unit, one of the sources said. 
    Other investment bank pitches to potential buyers will focus
on finding a partner for some of Thyssenkrupp's automotive
businesses, where Bosch  ROBG.UL , ZF Friedrichshafen  ZFF.UL ,
Nexteer  1316.HK  or Mando  204320.KS  are seen as potential
players, according to the sources.
    The company's Rothe Erde machine parts unit may attract
interest from Sweden's SKF  SKFb.S , Schaeffler  SHA_p.DE  and
Japan's NSK  6471.T , they said.
    "This is the breakup of Thyssenkrupp," said a senior banker
who declined to be named due to the sensitivity of the matter.
    All the companies either declined to comment on potential
deals or were not immediately available to comment.
    Kerkhoff has acknowledged that new ownership structures for
its businesses is needed to turn the company around. But
Thyssenkrupp declined to comment on any future asset sales.
    
    'NO QUICK, EASY WINS'
    Such a process will however be lengthy and difficult,
according to three separate financial and labour sources, for
two reasons: apart from elevators, all other units of
Thyssenkrupp are less profitable than their peer average, are
going through a restructuring or are in need of one.
    This is reducing their value and makes it less probable that
an M&A frenzy will ensue.
    "I don't see quick, easy wins unless assets are sold under
value," said another senior banker. "A fire sale is not the way
forward."
    Secondly, powerful labour representatives at Thyssenkrupp,
who control half of the seats on group's 20-member supervisory
board, are willing to oppose M&A that will result in further job
cuts among its 161,000-strong workforce.
    The 10 workers' representatives can team up with the Alfried
Krupp von Bohlen and Halbach Foundation, which holds a 21
percent stake, to veto major changes.
    The foundation's mandate is to preserve the unity of the
company while at the same time relying on healthy dividends to
fund its non-profit activities for promoting the "common good".
    It therefore needs to tread carefully, preserving the
company's future without obstructing needed reforms.
    The elevator IPO, part of a plan that also includes 6,000
job reductions, has found support because it brings in cash that
is badly needed to fix Thyssenkrupp's balance sheet and
strengthen the businesses as a whole.
    "It will be a difficult path for the company and its
employees. But we won't abandon workers," said Markus Grolms,
vice chairman of Thyssenkrupp's supervisory board and secretary
at IG Metall, Germany's biggest labour union.    
    
    POWER OF ACTIVIST INVESTORS
    The conflict at Thyssenkrupp also illustrates the growing
influence of activist shareholders on European household names,
with demands to tackle underperformance and simplify structures.
    Swedish investor Cevian, a shareholder since 2013 that has
long pressed for change, holds an 18 percent stake, while more
recent investor Elliott  ECA.UL  holds under 3 percent. Both
have criticised Thyssenkrupp's underperformance.
    Activists argue specialised businesses are often more highly
valued than conglomerates because in times of growth,
high-potential assets do not have to share the balance sheet
with cash-consuming, lower-return businesses.
    Conglomerates tend to be valued at a trading multiple of
some of their lowest performing business resulting in the
so-called conglomerate discount and higher refinancing costs.
    In recent years, groups that have reshaped their portfolios
through spin-offs and sales have outperformed peers in terms of
share price development, Goldman Sachs  GS.N  said in a study
last year, a trend which helped asset disposals in Europe reach
their highest level since 2007.
    "It's not necessarily that boards and companies were doing
things wrong before," said Rich Thomas, managing director and
head of European shareholder advisory at investment bank Lazard
 LAZ.N .
    "But things are different now and now boards and companies
need to do things differently because the world has moved a bit
underneath them," he added, referring to the rise of investor
activism. "And now, I think, in many ways European and German
boards are playing a little bit of catch-up."
    German labour leaders and credit agencies, for their part,
argue a diversified model with exposure to several businesses
with different growth, margin and cash flow generation rates is
an advantage when one sector enters a downturn.
    
    POST-WAR REFORMS
    Germany has been slow to embrace portfolio management
because of reforms introduced after World War II to safeguard
worker rights.
    In 1947, the United States forced the breakup of German
industrial monopolies so that they could not be used as
instruments of power by political forces, as had happened with
the steel industry under the Nazis.
    Krupp, which later merged with Thyssen in 1999, was among
the first companies to be dismantled. Among others, IG Farben
was split into businesses including BASF  BASFn.DE , Hoechst and
Bayer  BAYGn.DE .
    At the time, price controls were also lifted, sparking
concerns among German workers about their welfare so Germany's
leaders allowed industry associations including the German Trade
Union Confederation and Federation of German Industries to help
formulate new labour laws and working conditions.
    In 1949, collective wage-bargaining negotiations set a
minimum wage for entire sectors to ensure competition would not
mean a race to the bottom for wages. The law is still in place.
    Three years later, trade unions were also given the right to
appoint a third of company directors so they could have a say in
determining the conditions of hiring and laying off workers when
restructuring was needed.
    It is this law which has given Thyssenkrupp's workers a near
veto power to stop radical job cuts and even to block the
appointment of shareholder-friendly candidates to the board.
    Decisions at Thyssenkrupp have rarely, if ever, been taken
without the consent of workers.
    For CEO Kerkhoff, a deal for the elevator unit may mark one
of the last chances to raise cash to pay for necessary reforms
following three profit warnings, a botched plan to spin off its
capital goods business and the collapse of a steel joint venture
with Tata Steel  TISC.NS .
    But analysts at Jefferies are still sceptical about
management's ability to get the listing off the ground.
    "The timeline and execution of such a deal remain concerns
of investors," they said, adding management must come up with a
credible restructuring plan that is supported by unions and
convince markets the IPO will repair the group's balance sheet.

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The demise of an icon: Thyssenkrupp's share price    https://tmsnrt.rs/2WLcApb
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 (Writing by Christoph Steitz and Edward Taylor; Editing by
Pravin Char)
 ((christoph.steitz@thomsonreuters.com; +49 69 7565 1269;
Reuters Messaging:
christoph.steitz.thomsonreuters.com@reuters.net))