Midea Gets a Robot Arm

The rich premium paid for a stake in Germany's Kuka looks likely to be justified.

When you've got cash, you can afford to be generous. That may be the thinking for China's Midea, which sealed its takeover of German robot maker Kuka after promising to keep jobs intact for more than seven years.

Family-owned conglomerate Voith agreed at the weekend to sell its 25.1 percent stake in Kuka to Midea for $1.3 billion, making the Chinese appliance manufacturer the biggest shareholder and taking it well above the 30 percent minimum the company was seeking. Beside the jobs pledge, the terms include keeping independent management in place until the end of 2023, a time frame that's "much longer than the usual three to five years," Kuka Chief Executive Officer Till Reuter said at a press briefing last week.

It's no small commitment, considering that Kuka had 12,433 employees at the end of the first quarter, who surely won't come cheap by Chinese standards. Still, it made sense for Midea to dig into its pocket and try to assuage some of the concerns that have sparked political opposition to the deal in Germany. The benefits for the Chinese manufacturer are likely to more than justify the money it's shelling out.

Not So Hot

Midea's biggest revenue source is from selling air-conditioners and small appliances

Source: Bloomberg

Midea gets the opportunity to move beyond making low-end air-conditioners and washing machines, and take a place at the forefront of factory automation, a growing trend in China as rising labor costs eat into businesses in the world's second-largest economy. Although China is the biggest consumer of robotic equipment, accounting for 25 percent of unit sales, all the top four industrial robot makers are overseas companies. Midea, despite buying into a Chinese robot firm this year, remains a minnow in the field.

Asian Potential

The bulk of German robot maker Kuka's sales are in North America and Europe

Source: Company filings

Footnote: Figures are for 2015

Even in financial terms, the Kuka purchase isn't necessarily expensive, considering the alternatives available. Midea's tender offer is at 115 euros a share, a 60 percent premium to the unaffected share price on Feb. 3, just before the Chinese company almost doubled its stake to 10 percent (which has since risen to 13.5 percent).

The offer values Kuka at 48 times 2015 earnings, which may look lavish until you consider that Siasun Robot & Automation, China's biggest robot maker, trades at 94 times in Shenzhen. That underlines some of the strategic value of being in pole position for the wave of automation sweeping through the world's workshop, as Gadfly noted earlier.

What's more, Midea can afford it. The company had a war chest of 70 billion yuan at the end of 2015, according to brokerage CICC. That's equivalent to about $10.5 billion, or double the $5.1 billion value for Kuka implied by the Chinese company's tender offer. Midea has also received commitments from ICBC, China's biggest bank, for a bridge loan to fund the deal.

WH Group's success with Smithfield Foods, the U.S. pork producer, offers some evidence that Chinese companies can succeed in enhancing the performance of developed-market enterprises. While pigs are a far cry from robots, the common link and basis for optimism is a ready market for their products in China. 

Midea is certainly plunging headlong into the task of building international operations, having also bought the consumer appliance business of Japan's Toshiba this year and Italian air-conditioner maker Clivet.

In China, the potential is clear. With the population aging and workers becoming more expensive, robot demand is set to keep rising. This looks like a deal that will work out for both sides.

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

    To contact the author of this story:
    Nisha Gopalan in Hong Kong at ngopalan3@bloomberg.net

    To contact the editor responsible for this story:
    Matthew Brooker at mbrooker1@bloomberg.net

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