Why we will not invest in Cevian's Thyssenkrupp at current prices

Background:

Cevian invested in Thyssenkrupp in 2013, with the aim to break up the company. Thyssenkrupp is indeed a conglomerate of very distant and separate businesses. Key among them is the elevator business. The other businesses are different types of derivatives of steel. As such, these latter are highly cyclical with volatile volume and margin development.


Our investment Criteria is predicated on undervaluation and value creation


At Being and investments we are constantly evaluating cases where there is an active owner, with an active agenda. We see ourselves as evaluators of these cases and invest when we deem these fit our investment criteria, style and taste. There are several key factors underpinning our criteria, style and taste. One of them is that the investment must trade below what we deem to be intrinsic value at the time of our investment. Second, we must see a path to increase named intrinsic value, through operational and strategic change, backed by an active owner, and management team, with the skillset suited for the journey. Third, we must "like" the company, this often includes things such as "moat", ROIC, sensitivity to business cycles etc.


Thyssenkrupp is not trading below what we deem to be intrinsic long term value, even if considering a cyclical rebound of the steel business, and even accounting for a sale of the elevator business.


Thyssenkrupp has an enormous debt pile, and an even larger pile of pension debts, aggregating in total to EUR ~12bn in net debt. The market cap is about EUR ~7bn, resulting in an enterprise value of about EUR 19-20bn. This is steep for a company that during the last five years never recorded much more than 1,8bn in (adjusted) EBIT in any single year.


Currently, (after adjustments), today’s EBIT is trading at around EUR 0,8bn, with more than 100% of that stemming from the elevator business.


Thyssenkrupp is now a forced seller of its elevator business, given its precarious debt situation. Assuming that the company still would be able to sell the elevator business at a steep price, for about EUR 15bn, and somehow recoup its lost ~1bn of EBIT through a reversal of macro trends, the sum total value would not be much more than EUR 20bn, according to us, as we would not assign a steep value on the remaining non-elevator, cyclical EBIT.


Therefore, we do not think the company, trading at 12 USD per share, is valued below its long-term intrinsic value.


Operational turnaround + macro turnaround + successful divesture of the elevator business needed to give attractive returns.


The case would fly, if the company managed to sell the elevator business at a good price, recoup its lost cyclical EBIT, and turn-around the smaller and struggling businesses units. This could make for a 2x return potential. But there are many ifs, on of them the macro back-drop, which is outside the company’s control.


Looking back, it seems like Thyssenkrupp was trading for above the sum of its parts back in 2013/2014 when Cevian invested.


We do like cases where there is plenty to do operationally and strategically. But it loses its attractiveness, and its point, if many of these changes are already baked into the price of the company, or if the company is genrally just overvalued. In fact, we believe that Thyssenkrupp was trading at above the value of the sum of it parts, back in 2013/2014 when Cevian invested (the enterprise value stood at around EUR 24bn). We believe the elevator business got a too prominent role when the market priced the company, and/or potentially assigned a too high value on the cyclical parts of the business.


This is of course our view. The market, with its current low required rate of return, might think differently.




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