Siemens $25 Billion Financing Arm Helps Push Innovations
Siemens AG (SIE) Chief Executive Officer Joe Kaeser is leaning on the manufacturer’s 19 billion-euro ($25 billion) financial services division as a tool to help fund nascent technologies and promote them with customers.
Siemens Financial Services, which has grown from leasing Siemens’s trains and medical scanners to investing more heavily in infrastructure and energy projects, is now promoting the energy assets that Siemens bought for $1.3 billion from Rolls-Royce Holdings Plc (RR/) in May. The technology has applications in solar and wind plants, an area where SFS helps clients fund investments, unit head Roland Chalons-Browne said.
“If it’s a renewables project that’s using new or relatively untested equipment, we participate in that with equity or debt,” Chalons-Browne said in an interview. “That’s seen as an incremental endorsement of the technology. It raises the level of comfort of third-party investors.”
Siemens, which has been described in the past as being a bank with a manufacturing subsidiary, is using its financial clout as a technology incubator as banks become more risk averse. Kaeser, who took over as CEO last year, has acknowledged that Siemens was slow to make the most of the boom in extracting shale gas from hydraulic fracturing. He wants to make sure that error isn’t repeated elsewhere in the company, which has invested heavily into renewables energy.
The installation of the smaller fossil-fueled turbines acquired from Rolls-Royce in renewables plants is an example of technology whose application is promising but still relatively untested in the eyes of customers, necessitating extra financing support.
They can be deployed in so-called hybrid projects, providing a backup to wind or solar plants by supplying power to the grid when the sun isn’t shining or wind isn’t blowing, Kirk Edelman, the head of energy financing at Siemens Financial Services, said in the same interview last week at the unit’s headquarters on the outskirts of Munich.
“We’re excited about that because the acquisition of Rolls-Royce gives us some fast-start aero-derivative technology which lends itself very nicely to these hybrid projects,” he said. An increasing number of U.S. developers are considering adding these fast-start combustion turbines to their renewable plants, according to Edelman.
Kaeser, who was promoted from finance head, has streamlined the company’s structure and strategy to bolster the energy business as he seeks to catch up with the profitability of U.S. competitor General Electric Co. (GE)
Of Siemens’s closest competitors, only GE has a captive financing arm, which can provide an edge in sealing deals. For instance, Montreal-based Bombardier Inc (BBD/B) lost out on a $2.5 billion contract to supply trains for London’s Thameslink Rail Ltd. last year because Siemens was able to offer a deal that would see the rail connection paying nothing up front and leasing the trains.
GE has been downsizing its financing division, spinning off the consumer-lending unit, Synchrony Financial (SYF), in what was the U.S.’s biggest initial offering this year. During the latest economic crisis, GE Capital Corp. put the parent company at risk, prompting Chief Executive Officer Jeffrey Immelt to divest assets within the unit. Siemens doesn’t provide consumer lending.
SFS’s total assets have expanded to 18.6 billion euros last year from 12.5 billion euros in 2010.
Kaeser has promised to reduce Siemens’s exposure to risky projects as charges for late train deliveries and costly offshore wind projects consistently burdened profitability in the past. As SFS grows, it has to be careful to ensure it doesn’t nullify those efforts, according to Paris-based Societe Generale analyst Gael de Bray.
“The bigger SFS becomes, the higher the level of risk is,” said de Bray, who recommends buying Siemens shares. “In theory SFS would be involved only if and when they have a pretty strong understanding of what Siemens would provide and the kind of risk they would take.”
SFS has already helped push Siemens into new business areas. While renewable energy generated just 7 percent of Siemens’s 76 billion-euro revenue last year, less than fossil fuel power generation, it is the greatest single asset class held by SFS, according to Chalons-Browne. The company has increased renewable-energy revenue 17-fold since 2005, with the financing arm helping that expansion.
Siemens secured a $2.1 billion wind farm order this year in a Dutch offshore wind project, helped by SFS’s decision to take a 20 percent stake in the group funding the facility. Canada’s Northland Power Inc. (NPI) owns 60 percent of the group, with Dutch offshore engineering specialist Van Oord NV holding 10 percent and Dutch public authorities the remaining shares.
“Everyone’s chasing yield,” said Edelman. “You have a lot of new investor classes coming into energy that weren’t there traditionally, primarily institutional investors. In the energy space, the yield tends to hold up pretty well versus let’s say the leveraged finance market.”
Kaeser said in July he’s prepared to make more acquisitions to supply gas and oil equipment and benefit from the fracking boom in the U.S. Supplying more equipment would also give the company a lock on lucrative, long-term service contracts, he said.
The U.S. added about 21 gigawatts of wind and about 9.9 gigawatts of solar capacity in the past three years, according to data compiled by Bloomberg Intelligence and Bloomberg New Energy Finance.
Local clean-energy generation that’s backed up by small fossil-fired turbines may also become more important in Europe, and particularly in Germany, where towns and villages are “taking destiny in their own hands” instead of relying on transmission of offshore wind capacity from across the country, Chalons-Browne said.
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