value and opportunity

I had mentioned ThyssenKrupp already several times in the blog, last time when “patriarch” Berthold Beitz died in August as a potential special situation if they would do a big rights issue.

In the meantime, a lot of stuff happened, among them:

– Swedish activist fund Cevian disclosed a first stake in September and increased the stake in October
– Thyssenkrupp delayed the release of the 2013 annual results by 2 weeks because of negotiations for the US steel plant
– then, Thyssen came out with at least partly good news, that they were able to sell the US steel plant to Mittal and Japanese companies for 1.55 bn USD
– however, they also came out with some rather bad news, as they had to take back already sold assets from troubled Finish Steelmaker Outukumpu and sold their shares in Outokumpu at a loss
– finally they announced that they will do (and actually did this week) a 10% capital increase without subscription rights, netting them 900 mn EUR
– for me very surprising, the 25% (blocking) shareholder Krupp Stiftung did not participate and fell below the blocking threshold of 25%.

Looking at their presentation, ThyssenKrupp stresses mostly the following facts:

– 600 mn positive Free cash flow
– reduction of net debt from 5.8 to 5 bn

Interestingly, they do not mention pensions.

Looking into the annual report, one can see some interesting details:

1. “Free cashflow” is only positive because assets of 1 bn of assets have been sold. Without asset sales, FCF= Operating Cashflow -Capex would have been -400 mn. As asset sales are not a “going concern” business model, this should be taken seriously

2. According to the cashflow statement, 1 bn net financing has been issued (600 mn bonds, 400 mn loans). So how can net debt go down by 0.8 bn if free cash flow is lower than the increase in debt ?

The answer seems to be that they shifted ~ 1 bn of external debt to Outukumpu in the course of the stainless steel sale. This is how I could reconcile the numbers more or less:

So without the disposal, for the rest of ThyssenKrupp, net debt INCREASED by 200 mn EUR, so not so great actually. I think also their description of the debt reduction on page 45 in the (German) annual report is highly misleading.

The stock market didn’t be so impressed by those numbers either, the stock price recovery from the recent weeks was pretty abruptly stopped.

An interesting side issue with regard to funding: Thyssenkrupp shows around 6.2 bn EUR in prepayments. Although this is not unusual, especially for the plant building business, this kind of prefunding can easily dry up when the credit worthiness deteriorates. No one likes to advance a lot of money to a junk rated company.

Overall, the situation is clearly not as great as they try to communicate. Operationally, they still run at negative cashflow (including Capex, excluding asset disposals. I think this is also the reason why they do not really try to explain the numbers they used in their presentation. They are also extremely vague about the loan covenants. We do not know how long they are waived. This could be a big risk if some o the banks sell out to “Oaktree & Co”.

In my opinion, the capital increase was too small. In order to be able to survive 3 years, they would have needed at least 2 bn or so and this would only be enough if the global economy would remain at the current level. Even including the sales proceeds from the US business, there is little room for error with regard to TK’s quite optimistic plan.

For me, the stock is clearly not interesting in the current situation as the risk of a terminal loss is quite significant, which for any value investor should be a big “no go”.

Edit: One thing of course cn be argued FOR Thyssenkrupp: As long the corporate bond bubble enables a company like Thyssen to raise 5 years bond at a yield of 3.4% (current level of the 4% 2018 bond), they will survive for some time…..