By Gustaf Baavhammar, Chris Leung, Claire Camoin (University of Warwick), and Vincent Wess, Julius Kalvelage (WHU) | 16/03/2020
Overview of the deal
Acquirer: Advent International, Cinven Group, RAG-Stiftung, Abu Dhabi Investment Authority
Target: Thyssenkrupp (Elevator Technology)
Estimated value: €17.2 bn
Announcement date: 27/02/2020
Acquirer Advisors: Rothschild & Co, UBS, Goetzpartners
Target Advisors: Goldman Sachs, JPMorgan, Lazard, Deutsche Bank
Once a symbol for Germany’s industrial strength, Thyssenkrupp is on the brink of survival having been relegated from the blue-chip Dax index last year. The cumulative effect of downturns in Chinese and German manufacturing economies, weak demand for European steel, rising pension costs alongside mismanagement has presented significant downside risk for the steel-to-submarine conglomerate.
The sale is a turning point for the German industrial giant that has seen its core steel business report a loss in Q1’20 and will be Europe’s largest private equity buyout since 2007, when KKR took Alliance Boots private. Thyssenkrupp is selling its elevator unit to pay down €7.1 bn of net debt and reduce structural costs which include pension liabilities (a total of €16 bn). Initial considerations for an IPO were scrapped after investor feedback for a potential €15 bn valuation meant the German company would likely raise less by selling a stake on the stock exchange. Considering Thyssenkrupp’s aims, a sale to private equity seems the most appealing option that would not only achieve value maximisation but brings transaction certainty as a result of reduced antitrust scrutiny and could be completed within months.
A first round auction saw a €17 bn offer by a consortium comprising of Finnish competitor Kone and CVC Capital Partners, outbid competitors in terms of offer value. However, this was withdrawn on grounds of antitrust and legal concerns. The consortium including Advent International, Cinven, Abu Dhabi Investment Authority and RAG Foundation ultimately outbid other private-equity consortiums of Blackstone, The Carlyle Group and Canada Pension Plan Investment Board as well as Brookfield and Temasek by €700 m.
“It’s the remaining pearl of Thyssenkrupp. If you want quality assets, you have to build the conviction to pay for them. We feel good in terms of price.” - Ranjan Sen, Managing Partner at Advent International
Company Details (Acquirer I - Advent International)
Advent International is one of the largest global private equity investors. The firm has invested in over 350 private equity transactions in 41 countries and specializes in 5 core sectors: Business & Financial Services; Healthcare; Industrial; Retail, Consumer & Leisure; and Technology, Media & Telecom.
- Founded in: 1984
- Headquartered in: Boston, US
- CEO: Peter Brooke
- Number of professionals: 275
- AUM: €51.9bn - Total investments: 350+
Company Details (Acquirer II - Cinven Group)
Cinven is a leading international private equity firm focused on building world-class European and global companies. It has a strong performance history in Germany and its funds have acquired more than 50 companies in the DACH region.
- Founded in: 1977
- Headquartered in: London, UK
- CEO: Hugh Macgillivray Langmuir
- Number of professionals: 105
- AUM: €23 bn - Total investments: 130+
Company Details (Acquirer III - RAG-Stiftung)
RAG-Stiftung is a German foundation which was created by RAG Corporation, the largest German goal mining company, to support the discontinuation of the country’s coal mines. In order to secure long-term financing, the foundation has made strategic equity investments in companies such as Vivawest and Evonik.
- Founded in: 2007
- Headquartered in: Essen, Germany
- CEO: Bernd Toenjes
- Number of employees: 21
- AUM: €17 bn
Company Details (Acquirer IV - Abu Dhabi Investment Authority)
The Abu Dhabi Investment Authority is a sovereign wealth fund of The Emirate of Abu Dhabi. The company manages a global investment portfolio that is diversified across a wide range of asset classes, including public equity, private equity, infrastructure, and real estate.
- Founded in: 1976
- Headquartered in: Abu Dhabi, United Arab Emirates
- CEO: Hamed bin Zayed Al Nahyan
- Number of professionals: 71
- AUM: $696 bn
Company Details (Target - Thyssenkrupp’s Elevator Unit)
Thyssenkrupp is a diversified industrials group that operates in the areas of components technology, marine systems, elevator technology, steel, and materials services in Germany and internationally. Its Elevator Technology segment is involved in the construction and servicing of elevators, escalators, stairs and platform lifts, moving walks, as well as passenger boarding bridges.
- Founded in: 1811
- Headquartered in: Duisburg and Essen, Germany
- CEO: Martina Merz
- Number of employees: 161,538
- Market Cap: €4.32 bn - EV: €11.31 bn
- LTM Revenue: €41.93 bn - LTM EBITDA: €0.83 bn
- LTM EV/Revenue: 0.27x - LTM EV/EBITDA: 13.62x
Projections and Assumptions
Short-term consequences and Transaction Rationale
While there have been several noteworthy buyouts of German targets such as Bain Capital and Cinven buying generic drugmaker Stada for €4.1 bn in 2017, nothing comes close to Thyssenkrupp. The buyout marks a major shift in the German private equity scene which historically drew scepticism from labour unions towards buyouts relative to strategic acquisitions – particularly so with Thyssenkrupp where labour unions represent half the supervisory board. Arguably, extensive job cuts arising from Kone’s aggressive push for cost synergies to justify an acquisition price drove Thyssenkrupp to opt for the PE route.
The consortium’s offer stands at 17.3x EBITDA, and 2.2x revenue of €7.96 bn. Furthermore, the deal will be funded by a debt package composed of high-yield bonds and leveraged loans equating to 6.9x adjusted earnings, which is the acceptable upper limit of leverage going into a buyout transaction.
For Advent and Cinven, the buyout presents a strong strategic rationale, despite operating in a relatively congested Elevator & Escalator (E&E) industry shaped by 4 vertically integrated companies – Kone, Otis, Schindler and Thyssenkrupp themself. Most notably, market growth opportunities in E&E is supported by structural trends where urbanisation and increased urban mobility has created greater demands for access & convenience. The nature of Thyssenkrupp’s products and services means the company has a stable cash generating profile with predictable revenues. Long term contracts arising from the maintenance and servicing of lifts not only produces reliable income but is also resilient with protected downside – especially given the volatile conditions and effects of Coronavirus on the wider macroeconomic landscape. As a result, performance is not as heavily tied to the public equity markets and safety regulations require companies to pay for regular safety inspections, even during economic downturns.
Moreover, Elevator Technologies’ innovative product portfolio has helped propel itself to a strong market position in US, Europe and Asia. Combined with its economies of scale and specialisation in both standardised and high-performance elevators, they have the lowest operating margins with respect to its 3 main competitors.
Long-Term Value Creation Potential
The consortium is invested for a time span between four and seven years. Their goal is to accelerate the business’ growth through acquisitions as well as organically. Specifically, they see large potential in expanding the group’s service business for its own and third-party elevators.
There are significant consolidation and buy and build opportunities, especially with regional SMEs considering how fragmented the industry outside the Big 4 is. Plans going forward will be to expand the business by acquiring new companies “as fast as it can reasonably digest” them and Advent’s Head of Germany, Ranjan Sen, emphasises that they did not allow themselves to be pressured regarding the purchase price, so that there will be no shortage of funds for add-on acquisitions: “There is certainly no lack of funds for the expansion worldwide. We may very well see amounts in the single-digit billions”. Historically, Thyssenkrupp’s elevator business has grown to its current size through 50 takeovers, although the focus on acquisitions weakened in recent times. The result of the elevator group becoming the core business means they have sharper focus and thus a greater ability to take on different opportunities.
Organic growth may be accelerated by investing in product development as well as geographic market expansion, particularly in high growth markets such as Asia. The consortium also plans to invest in R&D in order to create an independent global market leader that is renowned for innovation and technology. Even in a downturn, when construction slows, there is potential for growth through securing more contracts to maintain lifts currently run by competitors. Structural trends mentioned above will also contribute to a positive growth outlook over the long term.
Risks and Uncertainties
Given the perception of some that we are in a late stage of the cycle with elevated asset prices, particularly in private markets, such an investment can be seen as risky. Some participants at this year’s SuperReturn conference expressed their uncertainty about whether the transaction could later be seen as a symbol of the private equity market’s peak. Blackstone, for example, had to write off about 70% of its investment in Hilton during the financial crisis after having purchased the company in 2007. Elevator Technology will also see its leverage ratio reach 8x, making it one of the highest levels in major European Private Equity acquisitions in recent years. This is at the top end of the range of what is acceptable for bond and loan fund managers and correspondingly puts more pressure on a successful implementation of the funds’ initiatives.
Moreover, the deal is interesting to many because of its size – it is one of the largest leveraged buyouts since the financial crisis. However, a larger deal size does not necessarily correspond to larger returns. Contrary, deals for companies valued at more than $10bn returned 81% to investors, compared to 92% for companies valued at or below $5bn according to Cepres. Lastly, another risk closely tied to deal size is the exit scenario. Given that financing of deals has never been easier and dry powder has never been higher, it might become more difficult for subsequent buyers to pay high prices for such assets. Especially given that strategic buyers such as Kone have pulled out of the bidding auction over fears of regulatory issues and that the majority of exits are from financial sponsor to financial sponsor, finding another PE firm willing and able to invest that much capital will become increasingly difficult.
“[The group had found itself] in a position to get our hands on a business that many people thought wouldn’t be available, or wouldn’t go to private equity” - Bruno Schick, Head of the Frankfurt office at Cinven Group