Ever since Heinrich Hiesinger took over as chief executive of ThyssenKrupp in 2011 with a mandate to sell assets and overhaul an ossified and tainted corporate culture, investors have looked forward to a day when the indebted steel conglomerate would finally clear its storm-damaged decks and reach full speed again

January 6, 2014 12:00 pm

ThyssenKrupp tests investors’ patience

By Chris Bryant in Frankfurt

Ever since Heinrich Hiesinger took over as chief executive of ThyssenKrupp in 2011 with a mandate to sell assets and overhaul an ossified and tainted corporate culture, investors have looked forward to a day when the indebted steel conglomerate would finally clear its storm-damaged decks and reach full speed again.By untangling a Gordian knot caused by €12bn in failed steel plant investments in the Americas, a crisis-hit stainless steel business and a host of compliance problems, investors believed the once mighty industrial icon might again begin to flourish after€6.5bn in net losses over the past two years.

But that moment of liberation was again pushed further into the future when last month, ThyssenKrupp was forced to partly reverse a deal to sell its stainless steel unit and decided to retain a lossmaking Brazilian steel plant after a difficult 18-month search.

Although ThyssenKrupp successfully offloaded an Alabama steel plant for $1.55bn to ArcelorMittal and Japan’s Nippon Steel and subsequently raised €882m in fresh capital to shore up its balance sheet, this was not the decisive break with the past that investors had hoped for.

The capital increase did little to repair ThyssenKrupp’s thin equity ratio (equity as a percentage of total assets) raising it from 7 per cent to more than 9 per cent – but did at least reassure ThyssenKrupp’s customers that the company retains access to capital markets.

Macquarie said the company’s transformational strategy had “taken a detour” and that although it remained confident that ThyssenKrupp’s restructuring would one day create shareholder value, “recent developments likely stretch out that timeframe and increase volatility near term.”

Analysts at Citi agreed that ThyssenKrupp “is now left with two underperforming steel assets taking up management time and group cash, putting an effective brake on its targeted transition to a capital goods company”.

The partial unwinding of the 2012 sale of ThyssenKrupp’s Inoxum stainless steel business to Finland’s Outokumpu came as a big negative surprise for investors. But senior managers argue that they made the best of a bad situation.

After the European Commission blocked a key plank of the Inoxum deal on competition grounds and stainless steel prices tumbled, lossmaking Outokumpu was left in severe difficulties.

As a minority shareholder and creditor, ThyssenKrupp risked further damage to its own balance sheet. Nor did it wish to partake in a capital increase at Outokumpu. Therefore it agreed to sell its 29.9 per cent equity stake and cut other financial ties with Outokumpu.

ThyssenKrupp is now left with two underperforming steel assets taking up management time and group cash, putting an effective brake on its targeted transition to a capital goods company

– Citi analysts

However, it was forced to take back two Inoxum assets on to its books: VDM, a high-performance alloy unit, and Terni, a lossmaking stainless steel mill in Italy. ThyssenKrupp plans to sell these two businesses again in the medium term but Terni in particular will require restructuring first.

“Outokumpu’s losses today stem to a large extent from units that we sold,” says a senior manager. “If we hadn’t sold them, our debts today would be €2bn higher and our equity €1bn lower.” ThyssenKrupp’s net debt stood at €5bn at the end of September.

After failing to sell the Brazil plant, ThyssenKrupp must now focus on stemming losses there after the business case came unstuck because of currency swings and cost inflation.

As part of the Alabama deal, ArcelorMittal has agreed to take an annual 2m tonnes of steel slab from the Brazil plant, thereby guaranteeing 40 per cent capacity utilisation there until 2019. However, the Brazil plant needs to produce and sell around 4m tonnes a year to break even, which will require ThyssenKrupp to find new customers in Latin America.

Management remain committed to selling the Brazil plant in the long term but after the disappointments of recent months are reluctant to commit to a timeframe.

In spite of continued losses in Brazil, at a group level ThyssenKrupp “expects a significant improvement towards break-even earnings for fiscal 2013/2014” partly because of the impact of ongoing cost-cutting measures.

Helped by the Alabama sale and capital increase it also expects its gearing – net debt as a percentage of equity – to fall back below 100 per cent. The closely watched measure had briefly ballooned to more than 200 per cent, causing steel customers to express concerns.

ThyssenKrupp retains several strong technology units – such as elevators, plant technology and automotive components. Thanks to these, ThyssenKrupp’s cash flow turned positive in fiscal 2012/2013 for the first time in six years. Analysts believe the businesses might flourish still further once freed from the burden of ThyssenKrupp’s legacy issues. Steel now accounts for only 30 per cent of ThyssenKrupp’s revenues.

Cevian Capital, the activist investor, is among those who believe there is value locked up in ThyssenKrupp. It took advantage of the capital increase to raise its stake in ThyssenKrupp to 11 per cent. Cevian has requested representation on ThyssenKrupp’s supervisory board but has said it supports management’s strategy.

Meanwhile, the Krupp Foundation, ThyssenKrupp’s largest shareholder which for decades has held sway at the company, did not take part in the rights issue, surrendering its blocking minority as its stake fell below 25 per cent.

Bankers have long argued that ThyssenKrupp should spin off its remaining European steel business or sell some of the capital goods units. Neither seems likely in the short term, however, given the depressed state of the European steel business and ThyssenKrupp’s pension obligations.

Mr Hiesinger conceded at a December press conference that “when one overhauls a company which like ours has over several years manoeuvred itself into a crisis, then it also takes years to put the company on a sustainable footing for the long term”.

In other words, investors who long for a fresh start at ThyssenKrupp will need to remain patient.