If U.S. Group Purchases German Elevator Company, Cuba’s Buildings And Hotels Could Have Problems Obtaining Parts; Another Issue For EU & Canada

UPDATE TO NOTE: On 27 February 2020 Thyssenkrupp AG selected a non-United States-led consortium to purchase its elevator division for approximately US$19 billion. Boston, Massachusetts-based Advent International Corporation (assets under management approximately US$57 billion); London, United Kingdom-based Cinven Partners LLP (assets under management approximately US$29 billion); Essen, Germany-based RAG-Stiftung Foundation (assets approximately US$11 billion). Advent International Corporation and Cinven Partners LLP will have equal “majority equity stake” while RAG-Stiftung Foundation will have a “substantial minority” and Thyssenkrupp AG will have a “substantial minority stake” in consideration of its approximately US$1.4 billion investment.

If two United States-based financial companies are successful this week, hundreds of buildings, including hotels, in the Republic of Cuba may no longer have access to parts for elevators.  And building plans and those under construction may need revise their architectural decisions. 

Of particular consequence could be reputational damage to the Republic of Cuba from tourists at hotels knowing the elevators they are using have not been re-certified by the manufacturer and the manufacturer is no longer providing spare parts. 

The world’s largest investment management company, New York, New York-based Blackstone Group Inc. (2019 revenues approximately US$5.7 billion; assets under management US$554 billion), Washington DC-based The Carlyle Group (2019 revenues approximately US$3.4 billion; assets under management approximately US$223 billion) and Toronto, Canada-based Canada Pension Plan Investment Board (2019 assets approximately US$410 billion) are seeking to purchase the elevator division (2019 revenues approximately US$9 billion) of Essen, Germany-based Thyssenkrupp AG. (2019 revenues approximately US$52 billion).  A decision is expected within the next seven days.  

Espoo, Finland-based KONE Oyj (2019 revenues approximately US$10 billion), which reportedly submitted a proposal valued at approximately US$19 billion, is no longer participating in the process.  Havana-based Tecneco N.V. represents KONE in the Republic of Cuba. 

In 1994, the Office of Foreign Assets Control (OFAC) of the United States Department of the Treasury issued the opinion that a United States business or individual subject to United States law may make a secondary market investment in a third-country business which has commercial dealings within the Republic of Cuba provided that the investment does not result in control-in-fact of the third-country business by the United States investor and the third-country company does not derive a majority of its revenues from business activity within the Republic of Cuba.  Secondary market investment that falls short of a controlling interest in such a business is not prohibited.   

The Thyssenkrupp elevator division does not obtain a majority of its revenues from the Republic of Cuba; the value of new elevator installations and delivery of spare parts is substantially less than 1% of global revenues.  Unknown if Blackstone Group and/or Carlyle will have control-in-fact of the Thyssenkrupp elevator division. 

However, the Trump Administration, assisted by members of the United States Congress, could pressure a United States-controlled Thyssenkrupp elevator to cease exports to the Republic of Cuba.  

The Brussels, Belgium-based European Union (EU) may attempt to include a provision in the transaction documentation requiring the Thyssenkrupp elevator division to maintain all existing sales and service contracts with the Republic of Cuba prior to the transfer of ownership. 

The government of Canada with its meaningful commercial, economic and political relationship with the Republic of Cuba may seek to pressure the new owners, particularly the Canada Pension Plan Investment Board, to continue exports to the Republic of Cuba, specifically through Canada-based entities. 

Elevators in the Republic of Cuba include those manufactured by KONE, Thyssenkrup (Iberostar Parque Central in Havana; Gran Hotel in Camaguey; Casa Grande in Santiago de Cuba among others). 

Elevators manufactured by Farmington, Connecticut-based Otis Elevator (2019 revenues US$13 billion) remain in service in the Republic of Cuba, but the company has neither sold nor serviced equipment since the 1992 Cuban Democracy Act prohibited foreign subsidiaries of United States companies from operating in the Republic of Cuba.   

Other elevator manufacturers, some of whom have equipment in the Republic of Cuba include: Ebikon, Switzerland-based Schindler Group; Tokyo, Japan-based Mitsubishi Electric Corporation; Hikone, Japan-based Fujitec Co., Ltd.; Tokyo, Japan-based Hitachi, Ltd.; Seoul, South Korea-based Hyundai Elevator Co. Ltd; Tokyo, Japan-based Toshiba Elevator and Building Systems Corporation; and Rison LeZion, Israel-based Electra Elevators.

Unknown is whether two properties affiliated with second-largest certified claimant, Bethesda, Maryland-based Marriott International, Inc. (2019 revenues approximately US$20 billion) and its subsidiary, Stamford, Connecticut-based Starwood Hotels and Resorts Worldwide LLC, have elevators which would be impacted if the United States company-led group purchases the Thyssenkrupp elevator division. 

Both properties (one currently through Starwood Hotels and Resorts Worldwide LLC) are in the city of Havana, the 186-room Four Points by Sheraton Havana and 83-room Hotel Inglaterra (delayed opening without public explanation from December 2016 to December 2017 to December 2019 to “sometime” in 2020).  Both properties are owned by entities controlled by the Revolutionary Armed Forces of the Republic of Cuba (FAR).  Marriott International has a series of two-year licenses from the OFAC to manage the two properties located in the Republic of Cuba.  The OFAC licenses were first issued in 2015 during the Obama Administration and were renewed during the Trump Administration.  Marriott International reported that the OFAC-authorized management contract for at least one of the properties requires the investment of millions of United States Dollars; unstated as to the shared responsibility for that investment.