Get a Lift With The Elevator Industry -- Heard on the Street

By Stephen Wilmot

The elevator industry is on the move, and there's a smart way to invest in it.

Industrial conglomerates on both sides of the Atlantic -- United Technologies in the U.S. and Thyssenkrupp in Europe -- are letting go of their elevator brands in an effort to refocus their corporate portfolios. The plans have put two cornerstones of an attractive capital-goods industry in play for the first time in years, likely opening the door to a deal.

A takeover of Thyssenkrupp Elevators -- a widely rumored target -- would give the long-suffering shareholders of its namesake parent company a much-needed lift.

UTC said last November it would distribute or "spin off" to shareholders shares in its two non-aerospace divisions: Otis, the world's oldest and largest elevator manufacturer, and air-conditioning giant Carrier. The spins, which were widely expected following UTC's $23 billion acquisition of airplane-parts maker Rockwell Collins, will take place early next year.

Thyssenkrupp's announcement in May that it would pursue an initial public offering of its elevator business was a bigger surprise, coming just eight months after the company unveiled a plan to split itself in two. The change was prompted by the failure of a project to merge its ailing steel business with that of Indian conglomerate Tata. When it became clear that the European antitrust regulators wanted more "remedies" than the deal's economics would support, the company seems to have settled on the elevator IPO as a more radical option to unlock the value trapped in its portfolio.

This could be substantial. Thyssenkrupp Elevators is by far the company's biggest asset. If it were valued in line with its highly rated independent peers, Kone of Finland and Schindler of Switzerland, it would fetch EUR14 billion, according to brokerage Jefferies. That is almost double the equity value of the Thyssenkrupp parent, which is admittedly weighed down by big debt and pension liabilities. How these are allocated will determine the elevator unit's eventual market value -- if it ever comes to market.

Thyssenkrupp Elevators could well be sold to a rival before the IPO. The cost savings achievable in a merger would be substantial, and the parent company's current board, led by fresh-thinking chairwoman Martina Merz since February, seems more willing than its predecessors to contemplate giving up control of the company's crown jewel.

Kone has long been interested in buying the company and is working with a bank to explore options, according to a Reuters report in May. Otis, once independent, is another potential bidder -- UTC Chief Executive Gregory Hayes has said as much -- but would face bigger antitrust hurdles than Kone because Otis and Thyssenkrupp are both dominant in North America. Kone is underrepresented in North America and strong in China, a weak spot for Thysssenkrupp.

Investors shouldn't expect an imminent move: To extract the highest price from any bidder, Thyssenkrupp has every incentive to pursue the IPO plan for now. Clearing a merger with German labor unions also seems likely to prove cumbersome. Eventually, however, the logic of consolidation is likely to prove irresistible.

Even if it doesn't and Thyssenkrupp ends up floating a minority stake in the elevator unit, the valuation gap with Kone and Schindler should narrow. With the German conglomerate fetching less than 13 times forward earnings and Kone almost 27, it is at its widest point in at least a decade.

Thyssenkrupp's battered stock is the obvious way for investors to play this story, but Otis and Schindler also could benefit from a Kone bid. Any transaction will need to satisfy antitrust authorities by offering assets to rivals.

Making elevators and escalators is an unusually stable business, with service revenues that protect it from the vagaries of the boom-and-bust construction industry. Thyssenkrupp gives investors a cheap way in.

Write to Stephen Wilmot at stephen.wilmot@wsj.com

(END) Dow Jones Newswires

July 01, 2019 07:00 ET (11:00 GMT)

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