Breakingviews: Advent can afford view from Thyssen’s top floor

Advent International and Cinven are paying premium dollar for the view from Thyssenkrupp’s top floor. The 17.2 billion euros the private equity groups are shelling out for the German group’s elevator unit is Europe’s biggest buyout since the financial crisis and way more than the expected price, courtesy of a last-minute race for the doors against rival Blackstone. Assuming chunky amounts of debt and aggressive growth in sales and margins, they can still make the ride worthwhile.

The final price – above the 17 billion euros offered by Finnish rival Kone, which dropped out of the hunt this month – is an unexpected windfall for Thyssenkrupp Chief Executive Martina Merz. And unlike with Kone’s bid, which would have run into major antitrust delays, the cash should land by September. That will let Merz pay down a chunk of Thyssenkrupp’s 7.1 billion euros of net debt, finance its 7.6 billion euros of outstanding pension liabilities and still have enough change to start turning around the sprawling conglomerate’s loss-making steel division.

The buyout barons, who teamed up in their bid with Germany’s RAG foundation, are paying over 16 times EBITDA, against typical average U.S. buyout levels estimated by Bain & Company of 11.5 times. The consortium applied debt equivalent to 8 times this year’s forecast EBITDA, a person familiar with the situation told Breakingviews – around 8.5 billion euros. Assume Advent can grow Thyssenkrupp’s revenue 3% a year, crank up EBITDA margins from this year’s 13.2% to 16% within five years, and allocate 30% of cumulative EBITDA to servicing its borrowing, and the investment should deliver a mid-level 15% internal rate of return, according to Breakingviews calculations.

Adding more debt would of course have enhanced that return. In its latest assessment of the private equity industry, Bain reckons 75% of U.S. buyout deals had debt over 6 times EBITDA, so Advent could possibly have gone higher than 8 times. Global trade wars and coronavirus may have prompted caution.

Still, Advent can help itself. Thyssenkrupp may have sufficient fat for a buyout baron to feel the EBITDA margin can be pushed higher than 16%. And even though its new products go up and down, the elevator business has remarkably steady revenue, mainly from recurrent maintenance and service contracts. That should ensure a good selling valuation – and avoid the winning consortium getting stuck between floors.

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