Spin off watch: Osram Licht AG

In a couple of days something happens which is very rare in Germany: Siemens AG is spinning of its subsidiary Osram to its shareholders.

For a German company, this is highly unusual, especially with a subsidiary of this size. And in fact, Siemens unsuccessfully tried to sell Osram for years as a “classical” IPO for cash. Siemens has a history with IPOs of subsidiaries. They IPOed their subisidiary Infineon in 2000 at the height of the interent bubble for 35 EUR, a price never seen again:

Maybe that’s the reason why no one wanted to pay cash for Osram ?

A good description of Osram can be found here in Wikipedia.

The English language IPO prospectus for Osram can be found here.

Some thoughts on this spin off:

+ Siemens is maybe the most bureaucratic company on this planet. So “releasing” Osram from that should be worth something

+ Timing: The timing looks bad from Siemens perspective. They wanted too much when Osram was highly profitable and now it seems that they don’t really care anymore or want to get rd of it before the have to invest into the new LED technology

+ Business
Although the business is very competitive, especially the LED part is growing strongly and Osram seems to be competitive here.

There is a whole lot of information about the business in the prospectus, I would summarize it as follows

– the business in general is cyclical and capital-intensive
– 2009 and 2010 were “special years because of EU regulation for the old light bulbs
new competitors seem to be able to enter in new technologies (LEDs) without much problem or even economics of scale from their core chip businesses (Samsung, LG)
– old bulbs were replacement businesses, new LEDs last a lot longer and are more like project business
– however technological change is quicker than in the past, “disruptive changes” are a reality
– the change to new technology requires lots of investments and results will suffer (and maybe the main reason why Siemens wants to get out now)

Major issue with this spin off:

Management compensation: High base salaries, insignificant share ownership of managers. This is was the prospectus says:

Shareholdings of Managing Board Members
The members of the Managing Board do not, apart from Siemens AG shares, directly or indirectly, hold any Shares or options on Shares of the Company as of the date of this prospectus. The members of the Managing Board in total hold 6,292 shares in Siemens AG for which 629 shares in OSRAM Licht AG will be issued upon the Spin-off becoming effective.

and

Siemens AG has granted the current members of the Managing Board of OSRAM Licht AG (as well as other executives of the future OSRAM Group) in the first quarter of the Fiscal Year 2013 a transaction bonus. After the Spin-off takes effect, OSRAM Licht Shares in a value of at least 50% and a aximum of 200% of the target amount established individually for each member of the Managing Board will be granted. The target amount is €2,500,000 for Wolfgang Dehen and €1,000,000 for Dr. Klaus Patzak as well as €250,000 for Dr. Peter Laier

One of the success factors of spin offs is that Managers are well aligned with share holders. I don’t think that is the case here despite the “spin off gift”.

Other observations:

Pension plan: 500 mn EUR have been injected in 2012 (contributed by Siemens), overall size of 2 bn is quite large.

Competitor Philips

Although I didn’t want this to turn into a fully fledged business analysis, I couldn’t help looking quickly into Philips’ 2012 annual report. although Philips Lighting is significantly larger than Osram (8 bn sales vs. 5 bn EUR), the bottom line of Philips Lighting was already negative in 2011 and even more in 2012. As Osram, they are reorganising the business. Their program is calles “Accelerate” vs.”push” at Osram. Funny that those great programs all sound so alike. Interestingly, Osram was slightly more profitable than Philips Lighting, both in 2010 and 2011. SO size alone doesn’t seem to be the big advantage.

It seems that both, Philips and Osram have to fight hard against the new competitors in the LED market.

Valuation

EBITDA was ~250 mn for the first 6 months of the fiscal year 2013. If we assume ~500 mn for the year 2013 and ~500 mn net debt, then 105 mn shares at 30 EUR would mean an EV/EBITDA of ~7. If we add 500 mn of unfunded pension liabilities, we have EV/EBITDA of ~8. That is not really cheap but rather expensive for such a cyclical and capital intensive business.

Summary:

For the time being, I think the Osram spin off doesn’t look very attractive at the prices (30-35 EUR per share) that were mentioned in the press. The most critical point is in my opinion that I don’t see a strong alignment of management and shareholders in this case.

This could be one of the cases where the first 1-2 years could look pretty bad. If at some point management would buy shares in significant numbers, this might be a sign to look at Osram again.

An unconventional idea would be actually to short the share right after the spinoff.

10 comments

  • Osram sind heute mit um 23,50€ gestartet. Zu Deinem im Bericht erwähnten Preis (30-35€) scheint der Preis ja mitllerweile attraktiv zu werden ( ca. 30% Rabatt).
    Die Berichte über Osram in den letzten Tagen sind ja ziemlich düster, Man bekommt den Eindruck, dass Osram bald pleite ist.
    So schlecht war das Management (Wolfgang Dehen) nicht unbedingt in seinem vorherigen Job bei VDO. Wurde ja erfolgreich an Conti verkauft.

  • never seen a MORE un-professional bunch…. – double negative with less (un) doesn’t work.

  • I met management today and must say I have never seen a less un-professional behaviour from a management with this size. Arrogant and not able to present an Investment case. On the other hand, the CEO has not such a bad track-record in his former positions. The book value is a bit above 21/share. That’s the level I would consider to look into it again.

  • One could also go short Siemens pre spin-off and cover Siemens after spin-off. But for me it depends on the price tag of Osram.
    Judging from your chart Infineon saw much higher prices than at IPO.

  • Have you taken a look at FNAC? It was recently spun off by Kering (formerly PPR) and appears extremely cheap (almost 1x EV/EBITDA). To be fair, the sustainability of these businesses is questionable (e.g. Best Buy), as is the FNAC 2015 margin expansion story, but they seem to be getting along just fine. They are adequately capitalized, and I think it may be oversold as owners of Kering (who wanted pure luxury goods exposure) and index trackers, coupled with the recent market weakness caused it to land in a bad place – that is to say, because it was trading fresh, the market didn’t have a point of reference, and I think there were some forced sellers. Would love to hear your thoughts – love your blog by the way

  • On the other hand shorting in risky: The accompanying bank for the going public should take early counteractions for these sellers.
    They can estimate about the number of must-be sellers and plan their strategies. So they can early contact some investors wo they know have to sell to find a smooth way. May be bying these shares in the own account for some time or “organizing” willing bidders for these shares…

  • “Siemens is maybe the most bureaucratic company on this planet.”
    Lanxess as Bayer-SpinOff was a good example how the “deliberation” from a bureacratic company can lift the earning power and hence the share price. But the tradition of Siemens spinoffs looks less good.

    “An unconventional idea would be actually to short the share right after the spinoff. ”
    Could be an interesting idea as well. Several investors of Siemens (pension funds, ETFfunds) are perhaps not allowed to invest in Osram as it is not in the DAX or has a too small market capitalization. These funds may be forced to sell the Osram-shares they get as spin-off from Siemens.

    • ETFs clearly will have to sell the shares. Siemens has a 9% weight in the dax and even a 5% wieght in the Eurostoxx 50. A lot of index funds track those indices. They all will be sellers.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s