September 28, 2018 / 10:27 AM / 22 days ago

Split marks only first step in Thyssenkrupp renewal

ESSEN/DUESSELDORF, Germany (Reuters) - Thyssenkrupp (TKAG.DE) still has a long road ahead of it trying to raise margins and profits in its mediocre business divisions, investors and analysts said, adding a landmark move to split itself in two needed to be followed by changes to strategy.

In one of the most radical shake-ups of a big German company in decades, Thyssenkrupp said on Thursday it would spin off its elevators, car parts and plant engineering divisions, splitting the submarines-to-steel conglomerate into two listed entities.

The spun off entity, Thyssenkrupp Industrials, will be minority-owned by Thyssenkrupp Materials, the remaining 18 billion-euro ($20.8 billion) business which will also include metals distribution, a 50 percent stake in the company’s future steel joint venture with Tata (TISC.NS), bearings and forging, and naval vessels.

But the new structure should not be mistaken for a new strategy, said Thomas Hechtfischer, managing director of shareholder advisory group DSW, which usually represents 1 percent of Thyssenkrupp’s voting rights at its annual meeting.

“There may be a problem in that a break-up by itself doesn’t make the business more profitable,” Hechtfischer said. “What you need is an additional strategy and I don’t see that yet.”

Cevian, Thyssenkrupp’s second-largest shareholder, has long called for a broader overhaul of the sprawling group, saying virtually all divisions underperform their direct peers.

Activist investor Elliott, too, has said there was significant room for operational improvement.

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Profit margins at Material Services, Thyssenkrupp’s largest division by sales, stood at 2.3 percent in the last financial year, compared with 6.8 percent at U.S.-listed peer Reliance Steel & Aluminum (RS.N).

At Elevator Technology, Thyssenkrupp’s most profitable business, margins stood at 12 percent, less than the 13.8 percent Finnish peer Kone (KNEBV.HE) made.

“Whilst we acknowledge that a split is a sensible step toward a broader portfolio change in Thyssenkrupp, it doesn’t change our fundamental concerns over the quality of earnings and balance sheet,” Barclays analysts said, keeping an “underweight” rating.

FIRST STEP

Thyssenkrupp shares, whose value had fallen by half since a 2011 peak, jumped as much as 17 percent on the news on Thursday, although they slipped 0.6 percent on Friday.

Guido Kerkhoff, installed as interim chief executive after the abrupt departure of long-serving Heinrich Hiesinger in July, announced the split after years of intensifying pressure from shareholders led by Cevian.

It was a bold move by the former finance chief who was initially seen as a stopgap. Kerkhoff managed to get trade union IG Metall and the company’s biggest shareholder, the Alfried Krupp von Bohlen und Halbach Foundation, to back the plan.

Cevian, which had lobbied for years for a move that would sharpen the group’s focus, also expressed its support.

“Kerkhoff has bought himself a lot of time with this,” said one investor who asked not to be named, adding the structural split was a step in the right direction.

Kerkhoff told ZDF television on Friday that although some administrative jobs may be lost as part of the transaction, he did not “expect any major effects” from the split.

The Industrials company will have about 90,000 employees while Materials will have nearly 40,000 workers.

The IG Metall union welcomed the move as a chance for all Thyssenkrupp’s businesses to survive and avert a complete break-up of the conglomerate, although it demanded that there be no compulsory redundancies and that it keep its supervisory board role which gives it effective veto rights on major decisions.

The split must now be officially approved by the supervisory board, worked out in detail, and then voted on by shareholders in 12 to 18 months’ time, Thyssenkrupp said. The board is due to meet on Sunday to give its blessing.

Analysts at HSBC broadly welcomed the move, although they cautioned that a potential merger of Thyssenkrupp’s elevator business with a rival was now off the table for the foreseeable future.

“We like the idea that TK shareholders will have a claim on viable industrials businesses,” global co-head of industrials research Michael Hagmann wrote, keeping his “buy” rating.

($1 = 0.8637 euros)

Writing by Georgina Prodhan; Editing by Alexander Smith and Keith Weir

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