Industrials

Chris Bryant is a Bloomberg Gadfly columnist covering industrial companies. He previously worked for the Financial Times.

Siemens CEO Joe Kaeser's last big deal, the $7.6 billion acquisition of oilfield equipment-maker Dresser-Rand, turned sour as soon as the ink dried. Slumping oil prices made the 28-times trailing operating profit multiple look poorly judged, to put it mildly.

Spanish wind-turbine maker Gamesa seems a better prospect. Siemens has hired Deutsche Bank to explore an acquisition, according to El Confidencial. That would create a new global number two in wind turbines by installed capacity, behind Denmark's Vestas.

A New Giant
Siemens and Gamesa would leapfrog GE to become the number two by installed capacity
Bloomberg Intelligence

The report made Gamesa's shares jump 15 percent on Friday, valuing its equity at 4.6 billion euros ($5 billion). Siemens advanced too, suggesting investors don't think it’s a daft idea.

The German maker of trains and medical scanners is big in offshore wind but is smaller onshore -- a much bigger, more competitive market. Its wind activities are rooted in Europe and the U.S.

Gamesa, by contrast, largely works onshore in fast-growing markets. Brazil, India and China represented more than two-thirds of 2014 orders, according to Bloomberg Intelligence's James Evans. And emerging markets accounted for almost half of all investments in renewables in 2014, according to Gamesa.

Gamesa Is Big in Emerging Markets
These countries accounted for more than two-thirds of 2014 sales
Company

Siemens will covet Gamesa's China business. The country is the world's largest wind market but Siemens has admitted that access for foreigners is difficult. Gamesa claims to be the biggest overseas wind-turbine manufacturer by market share in China, where it has a plant and is promoting a new low-wind turbine.

Emerging market exposure might look bad right now in other industries. But while Brazil's economy is heading for the worst recession in more than a century, its wind energy market is still expanding. Nor is cheap oil upsetting renewable power demand, for now.

Gamesa's sales are estimated to have jumped 23 percent to 3.5 billion euros in 2015. Thanks to a 2012 restructuring, operating profit is expected to increase two-thirds to about 300 million euros in 2015, implying an ebit margin of 8.6 percent. That would mean Gamesa has already surpassed the 8 percent target that CEO Ignacio Martin set last year for 2017. 

That's respectable in a competitive industry. Siemens targets a 5-8 percent profit margin at its wind division, but achieved only 4.8 percent last year.

Gamesa's steady maintenance revenues are an obvious attraction for Kaeser. Service contracts contribute 15 percent of the Spanish company's revenue but come with a 12.7 percent ebit margin.

A combination could deliver synergies in purchasing and manufacturing. Siemens is already adopting a standardized production system for wind turbines, mimicking the car industry. More scale could help.

Winds of Fortune
Gamesa and market leader Vestas surged last year, outperforming the more diversified Siemens.

Gamesa, 19.7 percent-owned by Spanish utility Iberdrola, isn't cheap though. At Thursday's close the shares were already up two-thirds in a year.

Siemens would need to offer a nice incentive to convince Iberdrola and other investors. Applying a 25 percent premium to the undisturbed price would imply an offer of about 5 billion euros.

Centerbridge Capital Parners paid 8.4 times trailing ebitda to acquire Hamburg-based Senvion last year, according to Bloomberg data. Applying that multiple to Gamesa implies a 4-billion euro value, suggesting Kaeser will need to find impressive savings to make a deal pay at 5 billion euros.

Financing would be no trouble, though. Siemens has 11.7 billion euros in cash and equivalents and adjusted industrial net debt is 0.8 times ebitda. Siemens holds 6 percent of its 76 billion-euro market capitalization in treasury shares, and could in theory use them in a cash and shares offer.

After the Dresser-Rand disappointment, Gamesa could be Kaeser's path to atonement -- providing he doesn't throw caution to the wind.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Chris Bryant in Frankfurt at cbryant32@bloomberg.net

To contact the editor responsible for this story:
James Boxell at jboxell@bloomberg.net