FRANKFURT Pressure is growing on ThyssenKrupp (TKAG.DE) to shore up its strained balance sheet by raising new capital as talks on selling its loss-making steel mills in the Americas drag on.
Once a symbol of German industrial prowess, ThyssenKrupp has been trying for more than year to offload the mills in Brazil and the U.S. state of Alabama, together known as Steel Americas.
With quarterly results due this week, no agreement appears in sight despite its aim for a deal by the end of September. The longer talks last, the more the benefit of any proceeds is eaten up by losses at Steel Americas. These were over half a billion euros in the first half of ThyssenKrupp's financial year alone.
ThyssenKrupp has emphasized it still has 8 billion euros of cash and undrawn credit lines, but analysts say Tuesday's third quarter results could show it is now in breach of some loan covenants, further shrinking the funds available to it.
At the end of March, the firm had 5.3 billion euros of net debt and its equity has been shrinking, prompting Moody's to cut its credit rating to "junk" status earlier this year.
Brazil's Cia. Siderurgica Nacional (CSN) is seen as the most likely buyer of Steel Americas but price is a sticking point. Analysts estimate it may sell for as little as 2.3 billion euros, much less than the book value of 3.4 billion.
Chief Executive Heinrich Hiesinger is likely to be grilled both on the Steel Americas sale and the company's finances during a conference call with analysts on Tuesday evening.
He faces a dilemma. Until the steel mills are sold, the company will struggle to persuade investors to participate in a capital increase that is expected to total between 750 million and 1 billion euros.
"Sooner or later, a bigger rights issue is likely to be tabled," said Joerg Schneider, a fund manager at Union Investment.
For the quarter, ThyssenKrupp is expected to report a 46 percent drop in net profit to 58.5 million euros.
The recent death of Berthold Beitz, patriarch of the Krupp Foundation - ThyssenKrupp's biggest shareholder - should give Hiesinger a freer hand in strategic decisions.
But it has also added to the uncertainty as the Foundation does not have the means to participate in a large capital increase on its own. Should it stand by the wayside when the company sells new shares, its 25.3 percent stake would be diluted and it would lose its blocking minority in the company.
That in turn would raise expectations of a breakup of the firm, something politicians in German industrial regions where ThyssenKrupp is a major employer want to avoid at all costs.
The favored solution involves RAG, a German state-owned trust that controls chemicals maker Evonik (EVKn.DE). It is expected to buy shares itself or lend money to the Krupp Foundation to preserve the blocking minority. But first, Hiesinger must seal the Steel Americas deal.
ThyssenKrupp began building the Brazilian mill about seven years ago, aiming for low-cost production in Latin America's biggest economy. However, wage inflation, rising iron ore costs and appreciation of the Brazilian currency made output much more expensive than expected, just as U.S. steel demand shrank.
ThyssenKrupp has sunk roughly 12 billion euros ($16 billion) into Steel Americas. The disaster cost former Chief Executive Ekkehard Schulz his job and led to the removal of supervisory board chairman Gerhard Cromme earlier this year.
Hiesinger, who replaced Schulz in early 2011, is shifting the company away from the volatile steel sector to higher-margin businesses such as elevators and factory equipment. But his efforts have been overshadowed by the crisis over Steel Americas. ThyssenKrupp's shares have lost about 45 percent since Hiesinger took over.
"Both the pending sale of Steel Americas and the potential rights issue have been a big overhang for ThyssenKrupp's shares for months," Nomura analyst Neil Sampat said. "Dealing with these issues will take away a big part of investors' uncertainty."
Talks having been going on for months, slowed by the fact that Brazilian miner Vale (VALE5.SA), which owns 27 percent of Brazilian mill CSA, needs to approve any deal and Brazilian government agencies are also involved in negotiations.
Completing the sale is crucial to Hiesinger's strategy. Steel Americas has sucked up time and money that could have been invested in the capital goods businesses.
Marco Scherer, a fund manager at DWS, says the firm's two most promising units - elevators and plant engineering - have been neglected, allowing rivals to innovate, become more efficient and win market share.
The elevator business is the world's fourth-biggest behind OTIS, Schindler and Kone. It has annual sales of 5.7 billion euros and is seen as a cash cow. But breakneck expansion has left it with a cumbersome mix of brands and product lines.
Switzerland's Schindler is among the competitors trying to take advantage. Earlier this year, it suspended its target for an operating profit margin of 14 percent in order to build factories, launch new products and spend more on market research.
"It's not yet about a competitive advantage, but first about eliminating the competitive disadvantage," Commerzbank analyst Ingo-Martin Schachel said.
($1 = 0.7508 euros)
(Additional reporting by Natalia Drozdiak and Arno Schuetze; Editing by Noah Barkin and David Stamp)