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But whichever way you cut it, Altair is an expensive purchase

Being late to a hot investment trend never comes cheap. So it has proved for Siemens. The German conglomerate is shelling out about $10bn for Altair, valuing the US industrial software maker at nearly 70 times this year’s expected ebitda. Throwing money about is rarely a recipe for a successful acquisition. But this deal could stack up for Siemens’ investors if it leads to a bigger rejig.

Altair’s high pricetag reflects its scarcity. It is one of a dwindling number of assets in a rapidly consolidating market. Earlier this year, Synopsis announced the $35bn acquisition of Ansys, while Cadence bought Beta for $1.24bn. That helps explain why Altair traded at 58 times ebitda prior to the potential deal being leaked.

A closer look at Altair’s prospects should mitigate — although not eradicate — valuation concerns.

Industrial software is a growth spot. Making things, whether headphones, watches, cars or fridges, used to be a nuts and bolts affair. As products have become more complex and data more abundant, manufacturers now want to build a ‘digital twin’ first and simulate how it will perform in different circumstances — when the product is hot or is used heavily. This is the service industrial software companies provide.

This deal is one of those rare occasions in which the concept of ‘cross-selling revenue synergies’ should not immediately send investors running for the hills, despite the tongue-twisting jargon. Siemens has a lot of software clients, but it lacked very specific capabilities in mechanical and electromagnetic simulation which Altair has. Conceptually, at least, the conglomerate group should now be able to sell its customers a more complete product.

Siemens is making some heroic assumptions, though. Adding together cost cuts of $150mn and mooted revenue synergies of $500mn (on Altair’s current margin), yields $260mn of extra ebitda, or 1.8 times that forecast for this year. Whichever way you cut it, Altair is an expensive buy.

But Siemens’ investors could find the acquisition useful. Their key problem is that, stripping out the conglomerate’s 75 per cent stake in Siemens Healthineers — the medical equipment maker spun off in 2018 — the group trades at a roughly 30 per cent discount to peers, reckons Nicholas Green at Bernstein.

Adding to core growth areas such as software might help reduce this, especially if acquisitions are financed by selling down other assets. Already, Siemens has flogged Innomotics, its large motors division, for $3.5bn. It has suggested it may sell 5 per cent of Healthineers to manage leverage. If the Altair bet prompts the group to tidy up its corporate structure, investors will be generous in judging its merits.

Eyewear giant chief Francesco Milleri says wearable technology developed with Meta will fuel growth

Glasses equipped with artificial intelligence helped EssilorLuxottica achieve the final goal of its late founder Leonardo Del Vecchio last week — a €100bn valuation — capping its transformation from a workshop in the Dolomite mountains to the world’s biggest eyewear manufacturer.

His successor is betting that smart eyewear developed with social media giant Meta will one day replace the smartphone in customers’ pockets, and fuel future growth.

On an earnings call this month, the maker of Ray-Ban and Oakley sunglasses said glasses integrated with tiny cameras and Meta’s AI assistant were one of the strongest drivers of quarterly sales, helping to push up shares and taking it to a market capitalisation of €101.5bn last week.

“The merger between Luxottica and Essilor was the evolution of our initial vision which had optics at its core. Then technology positively disrupted our plans,” chief executive Francesco Milleri told the Financial Times.  

“The next step with our Meta partners is to become leaders in the wearable computing space . . . [creating] glasses we think will one day replace most other technology devices,” he added.

His comments come as EssilorLuxottica last week hit a record valuation, but was also forced to respond after chief strategy officer Leonardo Maria Del Vecchio was placed under investigation by Milanese prosecutors as part of a sprawling probe into the alleged trafficking of illegally acquired private information, alongside dozens of others.

EssilorLuxottica expressed its “full support” to its late founder’s son over the weekend. A spokesperson for Del Vecchio declined to comment on Sunday. The company is not part of the probe.

EssilorLuxottica was created in 2018 through a complex €50bn merger of Italian billionaire Del Vecchio’s eyewear group Luxottica and French lens manufacturer Essilor. Luxottica started out in 1961, crafting parts for frames from Del Vecchio’s small workshop in the Italian village of Agordo.

The combined company has since grown into a global group with an annual revenue of over €25bn last year, making frames for designer houses such as Prada, Coach, Giorgio Armani and Chanel and pushing into wearable technology and healthcare.

Shares dipped slightly this week, leaving it hovering just below a €100bn market capitalisation, but are up by almost 25 per cent over the past 12 months.

EssilorLuxottica’s latest generation of Ray-Ban Meta glasses enable users to livestream what they see directly on to Facebook and Instagram and take pictures and videos that are automatically saved to their phones. In the US, the glasses are integrated with Meta’s AI assistant, giving owners the ability to ask the glasses for more information about what is in front of them. 

“These new technologies will one day replace smartphones, like streaming services replaced music CDs and electric vehicles will substitute combustion engines,” Milleri added.

EssilorLuxottica said this month that its Ray-Ban Meta smart glasses and a brand of photochromic lenses that react to sunlight, had both been “key” drivers of growth in the third quarter. Its smart glasses, which sell for over €300, were popular on the group’s ecommerce channel, and the best sellers in most Ray-Ban stores across Europe, the Middle East and Africa.

The group does not share sales figures for single products, but revenues for its direct-to-consumer segment grew by 3.2 per cent to €3.4bn over the quarter, while total revenue rose by 2.3 per cent year on year to €6.4bn.

EssilorLuxottica and Meta are now planning to deepen their partnership, announcing a new long-term agreement in September to develop “multigenerational smart eyewear products”. Meta is also in discussions with the group over a multibillion-euro investment, with chief Mark Zuckerberg confirming last month that Meta plans to take a “symbolic” 5 per cent stake in EssilorLuxottica. 

Together, Meta and the Franco-Italian group have the potential of “becoming the Samsung of Europe”, Zuckerberg said.

Over the past few years, Meta has spent billions of dollars on entering the wearable technology market, including creating virtual reality headsets.

Zuckerberg first approached Luxottica founder Del Vecchio in 2019 to explore a potential partnership, visiting the late billionaire in Agordo, where the company still has a factory. Milleri said that meeting sparked negotiations about how to develop a transformational product.

Smart glasses, says Milleri, are scalable unlike other wearable devices. “Momentarily cool but essentially extraneous devices previously launched by tech platforms [have] limited appeal,” he says.

“The strength of glasses is that billions of people already wear them and many more will in the future . . . they are part of our everyday lives, whether these are sunglasses or prescription ones.” 

Under Del Vecchio, who died in 2022 aged 87, Luxottica made a first attempt to develop frames with an embedded technology, which ultimately failed to sell due to low demand. “The mistake we made 15 years ago, in the early stages of developing smart eyewear, was to think that people would simply buy the technology,” said Milleri.

Early versions of smart eyewear developed by Luxottica and others, including social media platform Snapchat, came in large and unattractive designs.

“The reality is that consumers always want great-looking accessories and that’s why the iconic brands at the core of our strategy are more important than ever,” Milleri said.

EssilorLuxottica now has eyewear licences for numerous global luxury fashion brands, giving its Meta partnership significant expansion potential, according to Milleri. He said “luxury branded smart eyewear” would eventually become “part of our daily lives” as the technology becomes invisibly embedded into frames.

The technology is promising, but EssilorLuxottica and Meta may come up against stumbling blocks in the form of privacy regulations around the world including in important markets such as China and the EU.

Meanwhile, under Milleri, the eyewear group is also pursuing deals in sectors including medical technology, this year taking an 80 per cent stake in Heidelberg Engineering, a German company specialising in diagnostic and surgical technology for ophthalmology.

It has also built a stake in Nikkon, which specialises in precision optics and photographic equipment, and in 2022 acquired Israeli hearing technology start-up Nuance Hearing to develop glasses fitted with its acoustic beamforming technology.

“We’re pursuing new objectives, investing in eye trackers and health monitoring systems which will help in the prevention of certain diseases,” said Milleri.

The company also acquired US streetwear label Supreme for €1.5bn in July, expanding its portfolio beyond frames and lenses in a bid to target younger consumers.

“We began as eyewear makers but we [ultimately] realised that glasses will be an AI, cloud computing vehicle,” Milleri said.

Losses for owner of Selfridges more than double

Higher finance costs offset jump in sales at upmarket global department store group Cambridge Retail

Losses at the company that owns Selfridges and a number of other upmarket department stores more than doubled last year as higher finance costs offset a jump in sales to £1.6bn.

Cambridge Retail Group Holding, which is owned by Central Group, a family-business Thai investor, and by Saudi Arabia’s Public Investment Fund, recorded a pre-tax loss of £340mn in the 53 weeks to 3 February 2024, from £126mn in the same period a year earlier.

The wider losses came despite revenue jumping by 95 per cent to £1.6bn, from £804mn, and partly reflected a surge in its finance bill, which includes interest paid on borrowings, to £206mn from £96mn, accounts filed at Companies House on Thursday showed.

Cambridge’s results are the latest to highlight a challenging period for premium brands as spending among affluent shoppers remains subdued. Estée Lauder, owner of Clinique and MAC Cosmetics, on Thursday cut its dividend and abandoned the group’s profit forecast.

The Selfridges owner also disclosed that it had cut 500 jobs in the period it was reporting on. It now employs about 7,300 staff across the group, which includes Selfridges in the UK, De Bijenkorf in the Netherlands and the Brown Thomas and Arnotts brands in Ireland.

Central Group, owned by the Chirathivat family is the majority owner of the luxury retail chains. It first bought the portfolio with co-investor Signa Group from the billionaire Weston family for £4bn in 2021.

The partnership with Signa unravelled after property mogul René Benko’s empire ran into financial difficulties and subsequently collapsed last year.

Earlier this month Central struck a deal with Saudi Arabia’s sovereign wealth fund to co-own the group, with the PIF owning 40 per cent of its operating and property companies.

In separate filings for Selfridges in the UK, which was founded in 1909 by US-born magnate Harry Gordon, losses widened slightly to £41.9mn during the same period, from £39.3mn, on revenue of £834mn.

Selfridges Group said it was “pleased” with its performance last year “which saw a million more visits to our stores”. It added that this year it was trading in line with expectations.

Volkswagen and its EU rivals have allowed China to steal a march in EVs

The auto industry supports 6 per cent of the EU’s jobs, and Volkswagen is its biggest carmaker. So when the German group warns it must close three plants at home and axe thousands of workers, that is a sign of the stress Europe’s carmakers are under. European sales have yet to regain pre-pandemic levels, just when the industry is engaged in an epochal shift from internal combustion engines to electric vehicles — and has allowed Chinese rivals to leapfrog ahead in the new technology. Slow off the starting line, Europe’s carmakers face a restructuring as wrenching as the US auto industry after the 2008 financial crisis. But policy needs to play a more constructive role, too.

Despite two profit warnings in three months, Volkswagen is not in such desperate straits as the biggest US carmakers 15 years ago. It says it needs to raise operating margins in the core VW brand from 2 per cent in recent quarters to 6.5 per cent by 2026 to fund investments in its future. Targeting three plant closures may be its opening gambit in talks with Lower Saxony, which has 20 per cent of voting rights, and the unions. But VW and Germany are not alone in having to slash overcapacity and costs. Italian politicians are pushing Stellantis, which owns Fiat, Peugeot and Opel, to keep open its Fiat plant in Turin despite falling sales. Some French assembly lines are already being shifted offshore.

Germany’s big carmakers, in particular, were too complacent in assuming that the lucrative Chinese market could tide them over the tricky EV transition. Chinese manufacturers have stolen a march technologically and are supplanting foreign rivals in a market where, in July, half of all vehicles sold were EVs or plug-in hybrids. China’s upstarts benefited from huge state subsidies and lower labour costs, and started from a cleaner slate. They grasped more quickly, though, that EVs’ value lies more in snazzy software and electronics than in mechanics. In Europe, the cheapest new EV last year cost almost double the cheapest ICE car; in China, it cost 8 per cent less. China’s EVs are not only more affordable than foreign ones, they are often better.

Fearing a flood of subsidised imports, the EU this week imposed higher tariffs on Chinese-made EVs. But protectionism is not the answer. Europe’s auto industry has to face up to the need to cut costs by reducing capacity and jobs. With fewer moving parts, EVs were always going to need fewer people to build them. Though there will be social costs that must be mitigated, governments need to accept that keeping surplus or lossmaking plants open will only delay or derail a successful transition to new technology.

As well as making EVs more cheaply, Europe’s carmakers have to speed up model development, and find partners or outsource areas where they lack expertise. Tie-ups with Chinese counterparts they can learn from make some sense — though China’s newcomers might also use these to plug gaps in their own prowess, and gain access to ready-made distribution networks.

Smarter policy must also play a role. The EU has banned the sale of new ICE cars from 2035, and its tightening emissions standards will force automakers to sell fewer of them over time. But as Mario Draghi’s report on competitiveness noted last month, the EU decreed targets without a proper industrial strategy to achieve them.

It needs a comprehensive approach to developing the entire supply chain, including raw materials and the battery technology that lies at the heart of EVs, and of China’s EV success. Investment in charging networks and financial incentives are needed to encourage consumers to switch, so higher volumes start to cut production costs. It is not yet too late for Europe’s auto industry to narrow the EV gap. But China has opened a substantial lead.