18 November 2019 by jbchevrel
thyssenkrupp AG (TKAGR) manufactures industrial components. TKAGR produces flat rolled and cast steel, automobile parts, elevators and escalators, machine tools, bearings, nonferrous metals, and plastics. TKAGR develops and manages real estate as well as designs and constructs factories. TKAGR had proposed last year to split into 2 businesses: Thyssenkrupp Materials and Thyssenkrupp Industrial, the latter being itself split into 3 units (elevator, components technology i.e. automotive supplier and industrial solutions i.e. chemical and cement plant, mining equipment services). That was meant to make the company’s structure leaner, a step for to achieve lower than €300m general and administrative cost, by 2021 fiscal year. We will get FY results on nov 21. the planned sale or IPO of elevators will probably not be the only game in town. For this very reason, the performance of that unit will be scrutinized. But weak steel markets may also weigh on sentiment. The CDS was a notable outperformer in Q3 after all the M&A talks. It was indeed reported that the two PEs Blackstone and Carlyle have teamed up for a potential bid for TKAGR’s elevators unit. They were considering a joint offer for the business. It was also reported that Kone had interest in TKAGR’s elevator unit. From there started a bidding war, raising the unit's valuation toward the high end of the consensus’ back then €15-20b. Kone was considering partnering with CVC, another PE, to alleviate anti trust concerns. Then today Hillhouse Capital, an Asian PE joined the party, at a cited >€15b. that long list of bidders is expected to be whittled down to a handful in the next few weeks, or we might see combinations of thos bidders being gathered. Beyond the sale of elevators, profitability and cash flow may well be weighed down by the steel business, which is more likely to prove a headwind in this context. We may see a 3s5s steepening from the current ~85bp if that materializes. At the current ~215bp, we still do not price in an upgrade to IG. For that to happen, we would probably need to see steel prices rebound, FX headwinds revert, rising raw-material costs fade, among other factors.