FRANKFURT/DUESSELDORF, Germany (Reuters) - Thyssenkrupp’s elevator unit, which has been put up for sale by the ailing conglomerate, will cut costs, add lucrative service contracts and boost factory efficiency in a bid to raise margins and increase its appeal to potential buyers.
By far Thyssenkrupp’s most profitable division, Elevator will be either sold or listed in a bid to repair the group’s balance sheet, which has suffered from ill-fated investments, numerous profit warnings and rising pension liabilities.
The division, the world’s fourth-largest maker of elevators and escalators, is targeting an adjusted operating profit margin of 11.5-13.0% in the 2020/21 fiscal year, compared with 11.4% in 2018/19, it said during a capital markets day.
That would close or narrow the gap with larger rivals Otis, a unit of United Technologies Corp (UTX.N), Switzerland’s Schindler (SCHP.S) and Finland’s Kone (KNEBV.HE), whose comparable margins stand at between 11.5-15.3%.
The market for elevators and escalators, worth about 50 billion euros ($55 billion) a year, is expected to grow by more than 3% annually until 2024, Thyssenkrupp said, driven by the growing population in large metropolitan areas around the world.
“We believe Thyssenkrupp Elevator is in an excellent position to benefit sustainably from this expanding market,” division CEO Peter Walker said.
Elevator could sell for as much as 17 billion euros, analysts estimate. Binding bids are due by mid-January, two people familiar with the matter said.
Bidders include a tie-up of Kone and private equity firm CVC, a consortium of Blackstone (BX.N), Carlyle (CG.O) and the Canada Pension Plan Investment Board, and another consisting of Advent, Cinven and the Abu Dhabi Investment Authority, the people said.
Measures to boost the division’s margins include administrative cost cuts totaling 80 million euros over the next three years, Thyssenkrupp said.
It also singled out three production sites, two of them in Germany, that needed improving. Walker said talks with labor representatives had already started, declining to be more specific.
Finance chief Ercan Keles said he expected this to lead to restructuring costs of 200-300 million euros over the next three years.
The group is also banking on the 1.4 million lift and elevator units it maintains, of which 30-40% are from third parties, providing a predictable stream of revenue that it says shields it from cyclical downturns in the economy.
Service contracts account for about half of the group’s revenues, which stood at 8 billion euros in the 2018/19 year.
Additional reporting by Arno Schuetze; Editing by Louise Heavens, Kirsten Donovan