Osram/Bain/Carlyle: lightweight
Lighting group’s shareholders should ignore a lower bid
The light at the end of a tunnel might turn out to be an onrushing train. Weary shareholders of Osram will know that fear. They had more bad news this week. Interest from US private equity firms Bain and Carlyle in taking over the German lighting maker is flickering, according to local media. Osram countered that discussions are still on. Shares nonetheless dipped 6 per cent on Thursday. Osram shareholders should be wary of any opportunistic bids that follow.
Osram was spun out of conglomerate Siemens in 2013. As LEDs replace incandescent bulbs, lighting makers have had to adapt. Osram chose to specialise; half of its sales go to the automotive sector. A slump in global car sales is one reason for the company’s trouble.
Its share price has collapsed by more than half since the start of 2018, and sits not so far from all-time lows. Exposure to the chip cycle as well as China has only compounded the pain. Demand growth for lightbulbs used to be steady if unspectacular, somewhat insulated from economic cycles. Industrial specialisation at Osram has changed that.
One bright spot is Osram’s sound financial health. It has little net debt, only 0.4 times its ebitda (a cash earnings measure). Analysts forecast €150m of free cash flow annually from this year, after a difficult period. Its operating profit margin has more than halved to just over 2 per cent since it separated from Siemens. Indeed, a sound balance sheet should give private equity groups such as Bain and Carlyle more, not less, confidence to add leverage in the case of a buyout.
Bain and Carlyle may try to convince shareholders their offer is fair, but depressed earnings make Osram shares look expensive on any measure. Against peak earnings, Osram trades on just 6 times, a small fraction of its 2019 estimated PER of nearly 40.
Takeover talks with the US groups were confirmed in February at a price near €40. Since then Osram issued a profit warning at the end of March. Should a lower bid emerge, Osram investors should shine it on.