Siemens AG (fka SI)

[Enterprising Investor]

Solid Osram Spinoff Key to Siemens's Larger Aims (6/23/13)

By Eyk Henning
FRANKFURT—Even though Siemens AG's Osram lighting unit faces a tough stock-market reception, Chief Executive Peter Löscher can't flinch because the spinoff is critical to his plans for the German engineering company.

Shares in Osram Licht AG, as the company will be known, likely would face immediate and intense selling pressure as index funds and other Siemens shareholders exit the stock, according to bankers involved with the transaction and financial institutions holding Siemens stock.
Shareholders would get one Osram share for every 10 Siemens shares they hold in the proposed July 8 spinoff. Analysts say the move is less risky than selling stock outright to the public even though it doesn't raise any cash for Siemens.

Mr. Löscher needs the spinoff to proceed to demonstrate that Siemens can execute effectively a streamlining strategy, portfolio managers have said. In 2011, Siemens pulled a planned initial offering of Osram stock due to volatile market conditions as Europe's sovereign-debt crisis intensified.

Officials at Siemens and Osram declined interview requests for Mr. Löscher and Osram Chief Executive Wolfgang Dehen.

The industrial giant has faced months of shareholder grumbling due to cost overruns and delays on major electricity and high-speed-train contracts in Germany, a botched solar-power investment and lethargy in focusing on key businesses and cost cuts. Meantime, economic growth in Europe, Siemens's biggest market, has stalled.

But what is good for Siemens won't necessarily be good for Osram holders. The company alerted investors to the likelihood of a selloff in a prospectus published Friday. "It is likely that a number of shareholders will sell shares and the price of our shares may initially decline significantly," according to the prospectus.

The problem isn't just the uncertain business outlook for Osram. The business, which starts with annual revenue of €5.4 billion ($7.14 billion), is contending with volatile demand and falling prices as the lighting industry switches to energy efficient light-emitting diodes, or LEDs, from incandescent bulbs. The European economy also is sluggish. Osram faces tough competition from Philips Electronics NV, General Electric Co. and Asian competitors as it invests in new LED technology.

The bigger issue for Osram's early trading is likely to be institutional investors including index- and special-sector fund managers who hold Siemens. They are likely to unload their Osram holdings within the first five to 10 days because Osram won't be a component of the Frankfurt bourse's benchmark DAX 30 index, said portfolio managers. Around 30 million Osram shares, or roughly a third of the shares in issue, are expected to change hands.
Counteracting this "flow back," possibly by luring bargain-hungry, risk-taking hedge funds to Osram's stock, is important for Mr. Löscher. He also is trying to sell its stake in a telecommunications-equipment joint venture with Finland's Nokia Corp. and troubles with Osram could taint his other plans.

"Osram needs to do well so that on the one hand, Siemens doesn't face the accusation that it only divests shaky enterprises, and on the other, to alleviate criticism that Siemens spun it off too late," said Daniel Bauer of shareholder-protection group SdK.

"We're not especially keen on Osram shares," said a manager at a large German investment fund who declined to be identified by name. The manager believes Osram is facing weak growth and needs to invest heavily in LED technology. Against that backdrop, he said some hedge funds may even take short positions in Osram and only buy if the shares fall sufficiently. "If Siemens doesn't want to own Osram, why should it be attractive to outside investors?"

Osram is valued today at around €3 billion, half of what bankers thought the stock-market valuation would be when Siemens contemplated an initial public offering of Osram stock in 2009.

Even with the reduced valuation, Mr. Löscher has a hard sell ahead of him.
Osram last year announced a restructuring that includes shedding 8,000 jobs globally by 2014, from a workforce of 41,000 at the end of 2011. The revamp aims to achieve €1 billion in savings by 2015 and an 8% profit margin before interest, taxes, depreciation and amortization. The company suffered a net loss of €378 million in 2012 and forecasts a smaller loss this year.

Bankers close to the spinoff say the pessimism is overdone.

"Hedge funds traditionally take advantage of initial selling pressure weighing on companies that are spun off, and could build up a stake in Osram," said a banker close to the spinoff preparations.

Mr. Löscher and his executive team and advisers are meeting large Siemens shareholders as well as new potential Osram investors to promote the investment case in the run-up to July 8. One goal is to establish a so-called shadow book that helps match likely sellers with potential buyers when shares start trading to help support the stock price, according to bankers familiar with the proceedings.

-Ursula Quass in Munich and Isabel Gomez in Frankfurt contributed to this article.

Write to Eyk Henning at [e-mail]