Babcock Borsig Heading for Break-Up

Engineering group Babcock Borsig AG has survived several life-threatening crises in its 111 years of existence, but on Monday it reached the end of the road, and now the break-up of its activities looks inevitable.

In a negotiations marathon that stretched into the early hours of Monday morning, Wolfgang Clement, the premier of Babcock’s home state of North Rhine-Westphalia, failed to persuade the company’s principal bankers to participate in an 800 million euros rescue package.

“The banks have lost their confidence in Babcock and its management,” Clement was forced to concede on Monday.

Insolvency proceedings will now decide the fate of the company’s assets and its 22,000-strong global workforce.

Clement announced that Babcock’s supervisory board would appoint a new management board before the end of this week. The primary goal of the new leadership would be to “restructure the company within the limits of what is possible and under the new insolvency law” and to shift its focus to energy technology as its future core activity, the state premier said.

A strategy blueprint drawn up by business consultancy Roland Berger had been “further concretized” in the talks with the banks, Clement added.

But the search for a new chief executive is proving difficult. Jochen Melchior, CEO of Steag AG, said Monday that he would definitely not be available to take up the position at the helm of Babcock.

Over the past few weeks, there has also been speculation over the future of Babcock’s supervisory-board chairman, Friedel Neuber. Babcock shareholder Guy Wyser-Pratte had made no secret of his dissatisfaction with the former WestLB chief’s performance.

A source at one of the major Frankfurt-based banks said that a regulated insolvency proceeding now offered the best chance to save as many jobs as possible and to rescue those parts of Babcock’s business which stood a chance of survival.

Four out of Babcock’s six creditors had rejected Roland Berger’s rescue proposals. The main reason for their rejection was that new risks at the company were discovered almost daily during the crisis summit in Düsseldorf. Within a period of just two weeks, the total sum needed to finance restructuring doubled from 400 million euros to 800 million euros.

At the weekend, North Rhine-Westphalia’s government and the federal government expressed their readiness to increase their loan guarantees to 430 million euros, thus securing more than half of the value of the rescue package. But even that was not enough for the banks. “Even in the light of the increased guarantees, we see no basis for a revision of our decision,” the banks said in a letter to Clement.

But sources in Frankfurt said that three major Frankfurt-based bank are prepared to provide Babcock with the necessary financing to secure it as a going concern.

The NRW premier added that he had informed Chancellor Gerhard Schröder of the talks’ failure. With elections just eleven weeks away, Schröder had put severe pressure on the banks to join the rescue on Friday.

Once, the chancellor would have found the banks more compliant. Then, German enterprises could rely on the country’s banks to give them the kiss of life. But that was before the German banks, with their bottom lines under pressure, took a long, hard look at their lending policies.

A spokesman for the main opposition Christian Democrats said the insolvency pointed to a structural crisis in the German economy, while the smaller opposition FDP liberal party described it as "ill tidings for Germany as an economic center".

Babcock had been in decline for years but it suffered its most serious blow earlier this year when Chief Executive Klaus Lederer sold off a stake in its best-performing and most promising asset, Howaldtswerke Deutsche Werft (HDW), the world’s largest producer of conventional submarines. Lederer subsequently announced that he would be leaving Babcock to take over at the helm of HDW.

Babcock is now left with a wide range of underperforming power-plant engineering units as well as the 25% stake that it still holds in HDW.