Siemens to Buy Parts of Invensys Rail Unit
Siemens AG (SIE) Chief Executive Officer Peter Loescher is embarking on his biggest purchase in half a decade as he seeks to exorcise the ghosts of flawed acquisitions that have haunted him since the month he took office.
Europe’s largest engineering company said yesterday that it would buy Invensys Plc (ISYS)’s rail unit for 1.74 billion pounds ($2.78 billion) to bolster its signaling business, a price analysts said is high for an asset that has shown a mixed performance track record and promises limited cost savings.
Loescher has come under growing pressure to prove his strategic skills, after most deals that he supervised soured, and a push into more environmentally-friendly energy generation led to spiraling costs. Profitability at Munich-based Siemens has fallen back to the levels when Loescher started in 2007, and the CEO issued a new program to cut costs this month after acknowledging he’d been too slow to react to falling demand.
“Siemens is paying close to the total market capitalization of Invensys before the deal was announced, for only part of the business,” said Martin Prozesky, an analyst at Sanford C Bernstein Ltd in London. “The price paid is very high, it looks to me like Siemens, again, overpaid.´´
Invensys climbed 35 pence, or 13 percent, to 315 pence in London at 8.55 a.m., valuing the company at 2.57 billion pounds, after jumping 27 percent yesterday. Siemens gained 57 cents, or 0.7 percent, to 79.51 euros in Frankfurt.
The German maker of high-speed trains, power turbines and medical scanners plans to incorporate the Invensys rail- signaling business to beef up its on train assets. The company typically pairs large rolling-stock orders with signaling equipment to help boost margins.
Siemens also said it will sell some baggage-handling and parcel sorting operations. The combined transactions will raise earnings before interest and taxes, depreciation and amortization as a percentage of sales at the infrastructure and cities operations by 1 percentage point by 2014, unit head Roland Busch said on a telephone call today.
Most of Siemens’s rail-equipment assets are made in Braunschweig in western Germany and in Berlin, a remnant from the takeover of assets belonging to the former East-German railway. Siemens has struggled to boost profitability at its rail business over the years amid faulty trams and delays on big-ticket orders including the ICE high-speed train for Germany’s railway, for which the client wants compensation.
Busch said he doesn’t expect any material financial impact from the delays, and that Siemens will not buy and more rail companies. Press reports had named Siemens as a potential suitor for Ansaldo STS SpA (STS) earlier this year.
Invensys hasn’t been without challenges at its rail unit, either. The company had to book provisions at the business at the beginning of the year after reviewing some contracts. In May of last year, Invensys cut profitability margins at the rail unit to 15 percent to 17 percent ‘‘in the medium term.”
Siemens is paying about 15 times Ebitda for the asset, Bloomberg Industries estimates. That’s 25 percent more than the median multiple of 12 times Ebitda paid in cash deals by industrial companies featured in the S&P Europe 350 Industrials Sector Index in transactions worth at least $500 million in the past decade, according to data collected by Bloomberg.
Loescher’s willingness to commit a full price for the Invensys business may be partly a defensive move to secure the asset, said Bank of America Merrill Lynch analyst Mark Troman. Siemens said it plans to reap synergies of 100 million euros by 2018 from the transaction, a sum Bernstein’s Prozesky called “disappointingly low.”
The disposal is a major transformation for Invensys that focuses the London-based company on industrial software and automation. Invensys, the two-century-old company that makes software used to run the London Underground’s subway trains, gets half its revenue from its so-called operations-management unit, which sells technology to automate plants and industrial facilities and helps make them cheaper to run.
The purchase marks the largest acquisition since Loescher signed off on buying Dade Behring in mid 2007 for more than $7 billion, less than a month after taking office. Siemens slumped on the day the transaction was announced as investors questioned the price. The asset failed to perform and forced Loescher to write down the value, the first of several failed acquisitions on his watch that have hurt his reputation.
Even as the company’s cash pile grew, Loescher refrained from deals after writing down Dade, until he embarked on several purchases in the solar-power industry. Loescher pulled the plug on those assets a few weeks ago, saying the businesses had failed to live up to their promises.
By contrast, competitors including Schneider Electric SA (SU) and ABB Ltd. (ABBN) have made multi-billion purchases in areas such as power distribution and low-voltage equipment that have helped them increase margins and gain market share in areas such as the U.S. Loescher said this month that he would seek to make acquisitions in sync with disposals as he reviews operations.
While he is keeping with that mantra, the proceeds from divesting those assets, which are profitable, will probably be but a fraction of the price Siemens is paying for the Invensys unit, with Deutsche Bank AG estimating no more than 400 million euros ($517 million).
Invensys said it decided to sell the asset because it had “limited scope” to expand the business and a sale would leave the company more streamlined. Siemens had been named in the past by analysts as a possible suitor for Invensys’s rail-signaling business, after the company had expressed interest in buying parts of the company almost a decade ago.
Siemens is Germany’s largest maker of trains, and already has a signaling business, which competes with Alstom SA (ALO), Bombardier Inc. (BBD/B), Ansaldo STS SpA, and Thales SA. (HO) Board member Busch declined to comment on potential job cuts at the company’s rail unit.
Invensys will have a cash balance of 518 million pounds after the deal, CEO Wayne Edmunds told analysts on a call. The company may seek bolt-on acquisitions to complement its remaining business, he said. Talks with Siemens focused only on the rail assets, he said.
“The deal looks quite expensive, but clearly fits with the strategy Loescher has communicated - reducing exposure to pure manufacturing activities and pushing more into areas of automation and control,” said Heenal Patel, an analyst for electrical engineering at Bloomberg Industries.
The German company held a supervisory board meeting yesterday, where it also decided on a planned spinoff of its Osram lighting business. Siemens also said it will not extend the contract of management board member Barbara Kux when it expires in Nov. 2013, severing ties with the first woman on its top executive committee in the company’s 160-year history
The assets for disposal form parts of the Siemens mobility and logistics subsidiary within the infrastructures & cities division, which Loescher created to better address large urban clients. Siemens also runs divisions for health-care equipment, industrial gear and energy products such as power turbines.
The businesses offer parcel automation, airport logistics and airfreight handling, with about 3,600 employees and sales of about 900 million euros last year, and generated a “mid-single digit” profit margin, Siemens said today.
JPMorgan Cazenove Ltd. and Ondra Partners acted as joint financial advisers for Invensys, while Goldman Sachs Group Inc. (GS) advised Siemens.
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