ThyssenKrupp boxed in by dilapidated governance

(This article  was initially published on 4 December on Reuters Breakingviews.)

The steelmaker has survived an orgy of mismanagement that would have annihilated most companies. New management is trying hard to turn things around. Unfortunately, its room to manoeuvre is limited by a controlling foundation, which has too much power and not enough sense.

In many ways, German industry is the envy of the world. Ironically, the country’s oldest industrial behemoth has been in dire straits for a decade. ThyssenKrupp has been through an orgy of mismanagement, and is struggling to recover.

ThyssenKrupp frittered away 9 billion euros – 110 percent of its current stock market capitalisation – on a blighted investment in steel mills in Brazil and the United States. The company now has 5.3 billion euros of debt, a burden that limits investment in such flourishing business units as elevator technology and industrial plant construction. There has also been a string of allegations of anti-competitive behaviour and fraud. And the recession does not help.

The mere fact that ThyssenKrupp has survived so far highlights its inherent strength. Heinrich Hiesinger, the current chief executive poached from Siemens two years ago, has done a decent job of sweeping up the pieces.

He recently sold the loss-making stainless steel unit for a reasonable price. The debt burden is shrinking and an ambitious efficiency programme is under way. Hiesinger has decided to sell the unfortunate American plants. While this is the right decision, it will entail further financial pain in the short run. ThyssenKrupp will be lucky to receive half the assets’ 7 billion euro book value.

Hiesinger’s largest problem is the Krupp Foundation, which owns 25.3 percent of the shares and sharply limits his room for manoeuvre. The foundation, designed to maintain corporate unity, is run by the 99-year-old Berthold Beitz. A former confidant of the last Krupp, he is desperate to protect the family’s heritage and the foundation’s own position. He has blocked any capital increase, because the foundation cannot afford to take part. He also insists on a constant stream of dividends to fund the foundations’ numerous charitable activities. That hurts, since many operations are loss-making.

Furthermore, Beitz is loyal to Gerhard Cromme, ThyssenKrupp’s long-serving chairman who oversaw the ill-fated American foray. Cromme is still expected to succeed Beitz at the foundation. As long as the weak governance persists, investors should be wary.

Context News:

German industrial producer and steelmaker ThyssenKrupp will publish its latest financial results for the financial year of 2011/12 on Dec. 11. According to a Reuters poll, analysts expect a loss per share of 1.63 euros, but the company is expected to pay a dividend of about 0,35 euros per share.

The company has announced that it is trying to sell its American steel division, which has a book value of about 7 billion euros. Analysts expect that potential buyers will pay 3-4 billion euros.

On Dec. 1, ThyssenKrupp’s executive board member Juergen Claassen asked the supervisory board to suspend him from his post “until further notice.” The announcement came after German prosecutors started an inquiry into Claassen for suspected misuse of company funds. The board will address Claassen’s request at its next meeting on Dec. 10.

Prosecutors are also probing former ThyssenKrupp employees over alleged fraud connected to suspicious payments in Eastern Europe. In July 2012, the German competition authority fined ThyssenKrupp 103 mln euros for anti-competitive behaviour in the rail track business. A number of harmed customers, among them the German railway company Deutsche Bahn, are considering suing the company for compensation.

(This article  was initially published on 4 December on Reuters Breakingviews.)

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