MergerMarket
Osram Licht [ETR:OSR] could attract activist attention in light of shareholder criticism over strategy and a potential sell-down by 17% shareholder Siemens [ETR:SIE], two German M&A advisors following the company suggested.
An activist fund’s way forward could be influenced by whether Siemens’ stake is sold to a new strategic cornerstone or to financial investors more conducive to activist involvement. Demands could include a rethink on Osram’s recently announced strategy, management changes and the sale of assets from its diverse portfolio of businesses, they said.
The world’s second largest lighting company appears a good fit for an activist, the advisors said. Despite the criticism and share price turmoil, Osram is a relatively healthy company, they added.
Osram is valued at an EV/EBITA ratio of 13.66x, compared to peer Philips’ [AMS:PHIA] 18.89x, Dealreporter analytics show. Osram’s EBITA margin of 5.27% came in just below Philips’ 5.66%. On a price to earnings ratio, Osram’s 26.88x compares to Philips’ 33.28x, Dealreporter analytics show.
A recent change in strategy resulted in a 25% drop in Osram’s share price towards the end of 2015. Several large shareholders, including Siemens, openly criticised and voted against CEO Olaf Berlien at its recent AGM on the back of this.
Siemens was taken by surprise by a new five-year strategy announced by Berlien on 10 November and subsequently raised concerns about the decline in its investment value from EUR 940m to EUR 680m in 23 December statement.
A spokesperson for Osram declined to comment other than to say the company’s announced strategy was not a “U-turn” as has been portrayed in reports, but rather a “step forward” from its previous strategy.
Between 9 November 2015 and 23 December, Osram’s share price declined 24.5%. It had recovered to open at EUR 44.70 Monday morning (11 April 2016), marking a drop of about 15% since the November announcement. Siemens spun-off 80% of Osram in 2013 at EUR 24/share.
Prior to the November strategy announcement, Siemens was viewed as keen to sell-down its remaining stake, the two advisors said. Siemens declined to comment on its intentions regarding its remaining Osram shareholding.
Siemens might have looked foolish selling its stake in the immediate aftermath of the strategy announcement, the first advisor said. Six months later, there could be greater willingness to sell, particularly given its vote against CEO Berlien’s reappointment at Osram’s 16 February AGM and due to the partial recovery in Osram’s share price, he said.
A key factor is who could purchase the stake. Siemens is less likely to sell directly to an activist investor due to reputational factors, the advisors said. If an activist is able build a stake on-market it could look to align itself with any new cornerstone or buyers that end up taking sizeable positions, the advisors said.
A financial investor taking a stake could be more appropriate for an activist fund to work with, over a strategic buyer, the first advisor said. Having a financial investor take the cornerstone holding could mean an activist faces less risk of pushback if advocating a split of the company, he suggested.
A fund seeking to influence strategy or a corporate governance change could do well with about 10% of Osram shares, or support from shareholders amounting to around 10%, the first advisor said. Osram has a market capitalisation of EUR 4.6bn as of closing 07 April 2016.
Activist strategy
The big question is whether Berlien’s five-year plan is really so flawed, and what type of strategy might be favoured to replace it, the advisors said. A call would also need to be made on whether to push for a replacement for Berlien.
German institutional investor Union Investment senior fund manager Ingo Speich confirmed Union had sold almost all of its former 3% stake in Osram because it was not convinced by the new plan.
“We asked them to change the strategy because we believed it was wrong but they didn’t react and we sold almost all of our position immediately,” Speich said.
“We would have preferred Osram to focus on profitable niches such as automotive rather than entering the mass market business in LED Lighting, including a new factory in Malaysia, which means strong competition with aggressive Asian competitors.”
In terms of buyers for any divisions put up for sale, several strategic players have been linked with interest for certain Osram businesses. China’s MLS is reportedly interested in some operations, as is Shanghai Feilo Acoustics [SHA:600651].
Other Asian competitors in the LED space include China’s EUR 6.7bn market cap Sanan Optoelectronics [SHA:600703] and Taiwan’s Epistar Corporation [TPE:2448].
The focus on Osram also comes as competitor Philips is in the spotlight. The Dutch company has been running sale processes of its Lumileds and Philips Lighting businesses, highlighting strategics and financial buyers interested in the industry.
China’s GO Scale Capital was blocked by US regulators from buying Philips’ Lumileds business and has said it is now looking at non-US acquisitions. GO Scale was reportedly in line for Philips’ Lighting business.
Others interested in Philips Lighting include a Blackstone/Onex consortium, and Apollo Global Management with the Abu Dhabi Investment Authority. That process also drew early stage interest from private equity firms CVC Capital, KKR and Bain, it was reported.