February 13, 2020 / 3:57 PM / 13 days ago

Breakingviews - Kone may hold trump card in Thyssenkrupp endgame

Logo is displayed in an elevator at the KONE Academy of Finish elevators and escalators manufacturer KONE in Hanover, Germany, February 6, 2020.

LONDON (Reuters Breakingviews) - Finland’s Kone may have a sharp private equity-shaped elbow to deploy in the final rush for Thyssenkrupp’s lifts. The world’s third largest elevator operator could sweeten its 17 billion euro offer for its German rival by waiving the need for prior antitrust approval, a person familiar with the situation told Breakingviews. That would open the doors to lots of future headaches with regulators, but would at least take its bid several floors clear of the competition.

Thyssenkrupp’s results on Thursday gave new Chief Executive Martina Merz an apt reminder that time, as well as price, is of the essence in the sale. The former industrial titan, whose market capitalisation has halved since early 2018 to 7 billion euros, saw its struggling steel division record a 164 million euro loss in the first quarter due to more sluggishness from the auto industry. To turn its fortunes around, Merz needs cash sooner rather than later.

Ordinarily, that predicament should favour the private equity bidders in the elevator bidding war. With deep joint pockets and no competition issues, the likes of Blackstone and Carlyle could close their 16 billion euro offer within weeks. By contrast, Kone’s bid – assuming antitrust watchdogs hold it up for two years – would be only worth 14.5 billion euros in today’s money, based on a discount rate of 8% which equates to Thyssenkrupp’s weighted average cost of capital.

Even offering an upfront deposit of as much as 3 billion euros doesn’t close that gap much. Hence why Kone may be prepared to take the ultra-bold step of buying the division outright and worrying about the regulators later. That would give Merz the double benefit of an extra 1 billion euros from the sale, right now.

Such a deal would imply ‘four-to-three’ consolidation in most markets, leaving Kone with lots of competition hoops to jump through. Rivals like Switzerland’s Schindler are already threatening legal challenges, and major disposals would be probably required, especially in Europe. But with CVC Capital Partners on board, Kone has a buyer for the most contentious bits, and can perhaps operate the other parts at arm’s-length until regulators give their final say. Admittedly, it all sounds like a bumpy ride. For Merz, who would have stepped out several stops earlier, that doesn’t matter.

Breakingviews

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