Cinven and Advent, the private equity firms behind the proposed € 17.2 billion acquisition of Thyssenkrupp’s elevator business, are looking for other investors to help pay for the biggest buyout in Europe for a decade, according to people with direct knowledge of the situation.
The two groups are seeking to raise additional capital to reduce their own exposure to the transaction. They spoke to investors, including Canadian rival Brookfield, who had been beaten earlier in the multi-month auction for the elevator division, and the Canada Pension Plan Investment Board, said people directly aware.
The elevator deal was signed in February, just as the pandemic coronavirus crisis was starting to disrupt markets. Its high price of 17.2 billion euros was emblematic of a multi-year boom in transactions supported by the risk capital which had driven up asset prices.
While buyout firms often sell on pieces of equity after accepting large contracts, the crisis has left Cinven and Advent trying to sell at a high price when some investors have less money to allocate to private equity. This resulted in a longer process than usual.
“People will remember Thyssenkrupp in association with Covid as a historic deal before the market collapsed,” said an investor not involved in the deal.
Cinven and Advent plan to finance the acquisition with approximately € 7 billion in equity and the remainder in debt.
So far, buyout companies have raised more than € 2 billion in equity from investors, including the Abu Dhabi Investment Authority, Singapore’s sovereign wealth fund GIC and a Ruhr Valley group, RAG Foundation, said people familiar with the matter. Thyssenkrupp previously announced that it will invest 1.25 billion euros to maintain a minority stake in the elevator industry once it is sold.
People close to Cinven and Advent said the majority of equity syndication is taken care of and there is only a small piece left. Even if there were no more investors, the groups would still be able to finalize the acquisition, people said; the risk is only that they will end up owning more businesses than expected.
Typically, buyout groups try to avoid having too many funds concentrated in one transaction, as this can hurt overall performance if it goes wrong. The last Advent fund is worth $ 17.5 billion and that of Cinven is € 10 billion.
Some investors have refused to join due to limits on the maximum percentage of their funds they can allocate to private equity. A drop in the value of their equity portfolios has pushed existing private equity commitments closer to this threshold.
“The agreement was signed when it was signed and the world has changed,” said a potential investor. “There are many more investment opportunities available now than in February. The buyout companies declined to comment.
Speculation has also grown over whether Advent and Cinven will seek to sell parts of Thyssenkrupp’s elevator business, such as the North American unit, once the deal is signed.
The battle for the Thyssenkrupp elevators was fiercely contested for months, before Advent and Cinven finally ended competition from Brookfield, the Finnish Kone, and a group of investors led by Blackstone and Carlyle .
Meanwhile, some of the largest investment banks have been forced to make major credit cuts to their most recent results due to funding commitments made to pay for the deal. Part of the credit exposure has been hedged, and some losses may have been partially offset by a subsequent market rebound.
Goldman Sachs has the largest share, more than 1.5 billion euros of the 8 billion euros in debt contracted for the operation, three people familiar with the matter said in March. Barclays and Credit Suisse are also among the banks with high exposure, the FT said. In addition to this, there is 2 billion euros of so-called “payment in kind” (PIK) debt, which represents a higher risk because the borrower can pay interest with additional debt.
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The Thyssenkrupp elevator unit, which employs more than 50,000 people and posted revenues of 8 billion euros last year, is widely considered to be relatively safe from recession because the majority of its revenues come from contracts with service elevators. The share prices of rivals Kone, Schindler and Otis were not badly affected by the crisis. But the breadth of the deal made matters more difficult.
The Advent and Cinven offer values the company, whose elevators are installed in skyscrapers such as One World Trade Center in New York, at around 14 times its adjusted profit of just under 1.2 billion euros, said two people familiar with the matter at the time of processing it. Its total leverage, the debt-to-profit ratio, will be about eight times, one of the highest levels recorded on a large European private equity buyout in recent years.
The deal is expected to close in July, people familiar with the process said. None of the people contacted said they expected it to fail, a prospect that would be dire for Thyssenkrupp. The German industrial conglomerate relies on sales money to finance billions of euros in pension commitments and to consolidate its steel, automotive and materials activities.
Robert Smith’s additional report in London