Siemens Plans for Osram IPO Tested by Weaker Growth Outlook

Siemens AG (SIE) is trying to sell light bulbs to investors just as growth prospects darken.

The sales boost from the economic recovery is petering out and growth is easing at the Osram lighting subsidiary, Siemens Chief Financial Officer Joe Kaeser said yesterday. The Munich- based company has slated an initial public offering for Osram in the second half, in a sale that may raise about 3 billion euros ($4.31 billion), a person familiar with the plan said May 25.

Siemens is attempting one of the biggest share sales in Germany in a decade at a time when the European sovereign debt crisis is roiling investors and competitors in the lighting industry are buckling under falling consumer spending. Royal Philips Electronics NV, the No. 1 light-bulb maker, said last week it will extend cost cuts amid sputtering sales.

“It all depends on where Siemens’ threshold of pain for Osram’s valuation is,” said Thilo Mueller, who helps manage 120 million euros ($173 million) at MB Fund Advisory in Limburg, Germany. “The IPO isn’t dead, but there are question marks.”

Thomas Langer, an analyst at WestLB in Dusseldorf, today cut his value estimate for Osram to 5.5 billion euros from 6.3 billion euros. Osram’s issue price could be “disappointing,” and the sale may be delayed, he said in a note to clients.

Osram reported a more than sixfold increase in profit last year to 569 million euros, on revenue of 4.68 billion euros, after the year-earlier earnings were marred by costs to cut jobs and inventory. Siemens Chief Executive Officer Peter Loescher is seeking to rid Europe’s largest engineering company of one of its last remaining consumer businesses, saying Osram is better off alone to expand in the market for advanced LED lighting.

Falling Stock

Siemens rose 1.24 euros, or 1.4 percent, to 92.24 euros at 10.50 a.m. in Frankfurt trading, after posting their biggest decline in 15 weeks yesterday. Siemens has lost 2.6 percent in the last six months, less than the 26 percent drop at Amsterdam- based Philips.

Kaeser declined to comment further on the outlook for Osram’s IPO in a conference call yesterday, citing regulatory requirements ahead of the share sale. The company in May picked Deutsche Bank AG, Goldman Sachs Group Inc. (GS) and UBS AG to run the IPO, and said it will remain a “long-term anchor shareholder.”

The company wants to cede control of Osram after almost a century, as the lighting industry transforms from incandescent bulbs to advanced lights used in car headlights and buildings. Siemens predicted last year that the LED market will rise almost fivefold to 9.8 billion euros by 2013, from 2 billion euros in 2009. The overall lighting market is likely to grow 44 percent to about 65 billion euros by 2016, according to Siemens.

Turning Point

“We are at a turning point in lighting,” said Gerard Reid, an equity analyst at Jefferies International Ltd. “The real question is what the future holds, and the question mark has gotten bigger since we got the latest news from Philips.”

Philips forecast its lighting unit will report “low single-digit” sales growth in the second quarter, prompting Chief Executive Officer Frans Van Houten to temporarily seize day-to-day operations.

Rival LED maker Cree Inc. (CREE) on April 19 reported earnings and sales that missed analysts’ expectations. The shares of Durham, North Carolina-based Cree have lost almost half their value so far this year.

Osram licenses patents to other LED-makers, including Philips, Cree, and Nichia Corp. Governments are discouraging the use of conventional light bulbs, which convert only 5 percent to 10 percent of the energy used into light and have shorter lifespans than LEDs.

No More Bulbs

To help reach its target of reducing carbon dioxide emissions 20 percent by 2020 from 1990 levels, the European Union is gradually phasing out conventional clear incandescent bulbs. By next year, models such as frosted bulbs and high- energy halogen lights will also be erased.

“The list of the players in lighting is almost certainly going to look very different in five years’ time,” Aixtron SE CEO Paul Hyland said on a March 1 conference call. The Herzogenrath, Germany-based company is among the biggest suppliers of equipment to manufacture LEDs.

Financial market turbulence is disrupting planned share sales. At least 20 IPOs have been pulled or postponed in Western Europe this year as concern grows that Greece may default on its debt, according to data compiled by Bloomberg. Cie. de Saint- Gobain SA shelved a planned $1.1 billion IPO of its packaging unit, citing “market uncertainty and volatility.”

Cutting Jobs

While Osram’s recent past is marked by cost reductions and at least 5,000 job cuts, investors would be buying a business set to be dominated by capital spending as it seeks to stay ahead of tougher competition. Osram CEO Wolfgang Dehen predicted this month that the industry would undergo the most “dramatic, disruptive change” ever witnessed in the last three decades.

“Light is evolving from being a consumer product to becoming an investment product, with high upfront costs, amortization periods, and a completely different cycle,” said Andreas Eickhoff, an analyst at Dekabank in Frankfurt.

Sales at Osram have risen 3.5 percent over the past decade to 4.68 billion euros. Philips extended its lead during that period, growing revenue by 49 percent to 7.55 billion euros. Philips bought 12 companies active in lighting products and systems in the past 10 years, making it the most acquisitive company in the industry, data compiled by Bloomberg show.

Osram, which sells LEDs under the names of TopLED and Golden Dragon Plus, spent 5.5 percent of sales on R&D last year, compared with 4.7 percent at Philips. It supplies Ford Motor Co. (F)’s Mustang and Audi’s flagship A8 model and is developing an LED that will allow mobile phones to project films onto a wall.

Sharpening Focus

A retreat from Osram would advance Siemens’s move away from consumer-oriented and more cyclical businesses toward industrial applications such as turbines, factory automation gear and power-transmission equipment. Siemens sold the bulk of its telecommunications assets, on which the company was founded in the middle of the 19th century.

It also spun off its semiconductor business and renamed it Infineon Technologies AG (IFX), a move that provided a windfall at the height of the technology bubble in 2000, only to see its remaining holding shrink in value as chip prices collapsed.

“The lighting market may just follow in the footsteps of the computer-chip market in the 1990s,” said Juergen Meyer, a fund manager at SEB in Frankfurt. “Everyone wanted a piece of it, and in the end, nobody earned any money.”

To contact the reporter on this story: Richard Weiss in Frankfurt at rweiss5@bloomberg.net.

To contact the editor responsible for this story: Benedikt Kammel at bkammel@bloomberg.net.

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