FRANKFURT German conglomerate ThyssenKrupp (TKAG.DE) is close to selling its stainless steel arm, a key plank of its restructuring effort, but a sale to rivals could involve a break-up of one of Europe's market leaders.
An investment banking source with direct knowledge of the process said a deal could come as early as February.
Thyssen has said it aims to resolve the issue by the end of the year, as it pushes ahead with plans to slash its debt and carve off non-core assets.
The tough market for stainless steel, used in everything from cutlery to rail cars, has prompted major steelmakers to reconsider their involvement in an industry that is battling with competition from Asia, overcapacity and the consequences of an economic downturn. Giant ArcelorMittal (ISPA.AS) spun off its Aperam (APAM.AS) unit through an IPO last year.
A ThyssenKrupp source with knowledge of the process said the debt-burdened company was likely to opt for a sale -- as opposed to a spin-off or an initial public offering of the business.
"A sale is more likely than the other options," said a second investment banker involved in the deal, who requested anonymity because he was not authorized to speak on the record.
The key question is who, then, would be keen to snap up Thyssen's business, renamed Inoxum last year and valued by analysts at between 1 and 2 billion euros, with some excluding German operations because of ongoing restructuring there.
A private equity source with direct knowledge of the matter said ThyssenKrupp had asked a handful of private equity players to submit a bid for Inoxum but that most of those who were asked declined even before checking the books.
"They see Thyssen as an unreliable seller with strong unions that oppose private equity firms," the source said.
Analysts said a two-way break-up of the stainless steel unit would be the best way to secure a sale, as it would help dodge antitrust issues and could attract offers from private equity.
DIVIDE AND CONQUER
Inoxum could be split into its Italian assets, which include Italy's only maker of stainless steel flat products, and its domestic German operations together with the Americas.
According to industry sources last month, a U.S. private equity firm has already bid for the Italian stainless steel assets.
ThyssenKrupp Acciai Speciali Terni in Italy is one of the most advanced in Europe and is likely to attract Spain's Acerinox (ACX.MC), which rivals Thyssen for the position of Europe's top stainless steel maker, analysts suggested.
"They would be forced to sell some assets in order to win approval from cartel authorities. So why not just sell it in parts right from the start, to avoid an extended issue with the cartel authorities," Kepler analyst Rochus Brauneiser said.
"Maybe it's better to sell assets upfront rather than appear in the market as a forced seller," he said. Brauneiser estimated the Italian business could fetch 500 to 750 million euros.
DZ Bank analyst Dirk Schlamp said the Italian business would be easier to sell than the German Nirosta unit, though it would not necessarily be an easier deal to sell to politicians.
"The German operation is a political issue for Germany, but even in Italy it is too. The last time Thyssen wanted to close a mill there, even the Pope joined in the discussion," Schlamp said.
Other analysts said Aperam could be keen on ThyssenKrupp's U.S. stainless steel assets and Nirosta, while Finland's Outukumpu (OUT1V.HE) could be a natural partner of Nirosta because of geographical synergies.
Labor's clout in Germany however is a stumbling block.
The unions are adamant that Inoxum should be divested whole, complete with its high-performance metallic materials unit VDM, valued by some at around 500 million euros.
ThyssenKrupp, whose business stretches from submarines to lifts and car components, is selling non-core assets with revenues of 10 billion euros ($12.67 billion)to help repay debts, which stood at 3.6 billion euros as of end Sept 2011.
(Additional reporting by Tom Kaeckenhoff, Alexander Huebner and Edward Taylor; Editing by Sophie Walker)