Elliott Advisors criticises ThyssenKrupp-Tata deal terms
Activist investor and Cevian Capital express concerns over non-cash merger
Elliott Advisors, the US activist investor, has criticised the terms of the merger of the steel operations of ThyssenKrupp and Indian rival Tata, accusing the German industrial conglomerate of giving away assets too cheaply.
The non-cash merger to pool the European steel assets of ThyssenKrupp and Tata into a new company based in the Netherlands struck late on Friday does not need shareholder approval, having been agreed by ThyssenKrupp's supervisory board. Two members of that board voted against the deal, with a third abstaining, according to a person with knowledge of the matter.
ThyssenKrupp declined to comment.
The deal creates an enlarged group with €17bn in sales, 48,000 employees and 34 sites. The German group will transfer pension obligations worth €4bn into the joint venture, while Tata will put in €2.5bn in debt. Both partners will hold a 50 per cent equity stake, but ThyssenKrupp would get 55 per cent of the proceeds of a future initial public offering.
Calculations by Elliott, which owns a stake below the 3 per cent disclosure threshold, seen by the Financial Times estimate ThyssenKrupp’s fair stake in the new company at about 80 per cent, based on the higher profitability of its European steel operations.
Elliott estimates that ThyssenKrupp's higher share in the proceeds of a future IPO are worth €150 to €200m. The funds declined to comment.
Cevian Capital, the Swedish activist investor which holds an 18 per cent in ThyssenKrupp, also has concerns about the valuation of the deal, according to people with knowledge of the situation.
The fund manager, which did not comment on the valuation, on Sunday welcomed the joint venture as “a step towards reducing the overly complex conglomerate structure”.
But Lars Forberg, founding partner of Cevian Capital, said in a statement that there was “now an urgent need and opportunity to address the significant and persistent underperformance of the industrial businesses” of ThyssenKrupp. He said the group’s conglomerate strategy and matrix organisation “have failed”.
A person close to Elliott pointed out that ThyssenKrupp’s industrial operations were performing worse than peers, as profit margins and growth rates were both subpar.
“The key question is if the people at ThyssenKrupp who are setting the new targets are credible, given that they did not meet a single target over the past seven years,” the person said, adding that “the upside of the company is enormous”.
Heinrich Hiesinger, chief executive of ThyssenKrupp, defended the deal. “There was not any unreasonable compromise,” he told analysts in a call on Saturday, adding that the tie-up created about €5bn in additional value for both partners due to cost synergies.
The criticism will add pressure on ThyssenKrupp ahead of an update this month to investors about future plans. The Essen-based group, whose products range from submarines to chemical plants, car parts and elevators, is reviewing strategy and targets for its remaining industrial operations.
About 4,000 jobs will be axed in the merger, which aims to bring down annual costs by €400m to €500m. The companies plan to cut overhead costs, pool procurement and use different production facilities more efficiently. Over time, lower capital spending and better working capital management are expected to generate additional cost savings.