From a makeshift command centre deep in Germany’s rustbelt region, Sanjeev Gupta sketched out a plot to seize control of one of the country’s oldest — and most symbolic — industrial concerns.
The controversial British tycoon this month tabled an offer of an undisclosed price for Thyssenkrupp’s ailing steel division, which traces its roots to a foundry built by Friedrich Krupp in the Ruhr valley in 1811.
The surprise approach by Liberty Steel, a privately owned company that only five years ago was virtually unknown and has no real presence in Europe’s leading economy, kickstarted a process that could see the unit fall into foreign hands for the first time.
If the audacious bid underlined the faded fortunes of the German conglomerate, which once produced everything from submarines to lifts and is being dismantled under chief executive Martina Merz after years of underperformance, it showed the opposite trajectory of Liberty’s founder.
The former commodities trader has rapidly assembled a $20bn metals-to-energy powerhouse through acquisitions around the world. Clinching Europe’s second-largest steelmaker would be a crowning moment — and his biggest deal yet.
But for that to happen, the 49-year-old entrepreneur must overcome a number of obstacles — even if Thyssenkrupp’s management proves amenable and other steelmakers fail to outbid him — including a possible backlash from unionised workers and doubts over his credibility.
“We see value where others don’t,” Mr Gupta said of his latest target, which is set to lose €1bn this year. “And when we do, we invest and change what needs to be changed.”
He added that he was “in it for the long run” and would be able to plough enough money into the new entity to transform it into a low-carbon steelmaker. Others are less convinced of the rationale.
“It’s his ego talking here,” said one industry adviser. “Why would you take on a big company with massive overheads and a significant challenge in the future in the transition to decarbonisation?”
Among the obstacles is how a self-styled industrialist whose spectacular rise has attracted scepticism will fund a business, worth almost €3bn according to some analysts, that is bleeding cash and will require huge investments to remain competitive.
A lack of transparency over Liberty’s finances has provoked questions over the sustainability of its growth and strategy, while its owner’s borrowing arrangements have piqued the attention of regulators.
A tie-up would result in a producer with about $25bn in turnover and a workforce of more than 50,000, encompassing both companies’ European sites and Liberty’s facilities in Australia, the US and India.
However, this could dilute the importance of Thyssenkrupp’s steel operations, which are largely based in the state of North Rhine-Westphalia, home to all three candidates to succeed Angela Merkel as head of the ruling Christian Democrat party.
“Thyssenkrupp is a very important employer in the region and it also emits some two per cent of all sorts of German carbon emissions, so in many areas, it’s very political,” said Ingo Schachel, an analyst at Commerzbank.
The powerful IG Metall union is implacably opposed to a foreign takeover and is lobbying for the German state to take a stake, fearing a merger might lead to further job losses on top of 6,000 announced across the group.
“To solve its many problems, Thyssenkrupp steel needs capital, not a new owner,” said Jürgen Kerner, head treasurer of IG Metall and a member of the company’s supervisory board.
Liberty will also be mindful of the Krupp Foundation, Thyssenkrupp’s biggest shareholder with almost 21 per cent, which has the task of “preserving the integrity” of the historic enterprise but maintains it will not interfere with the day-to-day management of the company.
With excess production capacity dragging down prices and profits, experts say consolidation is key to strengthening the steel sector. The industry in Europe in particular faces existential challenges from the impact of Covid-19, high volumes of imports and pressure to meet EU climate change targets.
Yet rather than rationalise, Mr Gupta plans to increase output. Liberty says its assets complement Thyssenkrupp’s with little overlap, making it less likely that Brussels would reject the deal on competition grounds.
But that also limits the scope for reducing costs. About half Thyssenkrupp’s steel sales are linked to the automotive industry, which is not expected to recover to pre-Covid levels for several years.
Even if there is a logic to the combination, Mr Gupta’s record is likely to receive close examination in Germany, which prides itself on the responsible stewardship of industrial assets.
Since reopening a Welsh steel rolling mill in 2015, the Indian-born UK national has snapped up struggling furnaces, aluminium smelters, engineering plants and mines under the banner of GFG Alliance, a loose collection of Gupta family interests that include Liberty.
For all his braggadocio and promises of revitalisation, though, Mr Gupta’s turnround tactics have included seeking support from public authorities eager to secure jobs. As GFG Alliance is not a legal entity itself but rather a loose collection of dozens of individual businesses, there is little insight into its overall finances and performance.
A year after pledging to incorporate its numerous steel ventures into a single company and publish consolidated financial statements, Liberty has blamed the pandemic for delays and is promising the accounts by the end of 2020.
Attention will inevitably turn to how Mr Gupta will muster the financial firepower required. Liberty said its non-binding indicative bid included “a number of letters from financial institutions” on the potential provision of funds “with no commitments at this stage as is typical for this phase of the offer process”. It named only Credit Suisse, which declined to comment.
Until now, GFG’s expansion has largely relied on forms of finance linked to customer payments that are typically more expensive than standard corporate debt.
Billions of euros have come this way from Greensill Capital, a start-up backed by Japanese technology investor SoftBank that specialises in supply-chain finance. In effect, this means paying suppliers early for a fee, or else providing upfront cash for client invoices not due to be paid for months.
A German bank owned by Greensill has been probed by the country’s financial regulator, BaFin, over its level of exposure to companies connected to GFG, as first reported by Bloomberg.
Greensill said it did not comment on work for clients, adding that it was in compliance with all regulatory requirements in the jurisdictions where it operates.
And a lender owned by Mr Gupta himself, Wyelands Bank, has come under scrutiny from the UK’s banking watchdog over its loans to shell companies that finance GFG entities.
If instead Liberty tries to raise conventional acquisition finance secured against the Thyssenkrupp assets, it will have to convince lenders there will be no repeat of its first big foray into traditional corporate borrowing.
Within a year of securing a $350m term loan from a club of lenders to fund its purchase of a large aluminium smelter in France in 2018, the borrower fell into technical default. While no scheduled payments were missed, the issues included delayed filing of audited accounts and a requirement for Mr Gupta to inject more cash into the venture.
However he funds the bid, there is no reason to believe that Mr Gupta will benefit from being a frontrunner, according to people close to Thyssenkrupp.
His approach could encourage other potential suitors, such as Sweden’s SSAB or Germany’s Salzgitter, as well as Tata Steel Europe, whose proposed merger with Thyssenkrupp’s unit was blocked by Brussels last year.
Following the blockbuster €17bn sale of its elevators division this year, Thyssenkrupp is “not under immediate pressure from a liquidity perspective because they’re sitting on more than €5bn in net cash”, said Mr Schachel. Ms Merz has vowed to examine all options for steel before making a final decision.
But the single-minded boss will know that finding a solution for the storied business will become much harder once campaigning for Germany’s general election begins next year.
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