Siemens CEO Seen Urged to Weigh Health Split: Real M&A

Siemens AG’s new chief executive officer may be able to unlock almost $7 billion of value by splitting off the health-care division that was built on one of his predecessor’s most criticized deals.

Joe Kaeser, the 33-year Siemens veteran who became CEO three months ago, has received proposals from investment banks about an initial public offering or spinoff of the health-care unit, according to two people familiar with the matter, who asked not to be named because the discussions were private. While it’s the most profitable of the German company’s four so-called sectors, the health-care operations would be valued more highly as a standalone entity and deliver almost 5 billion euros ($6.7 billion) for Siemens investors, said Societe Generale SA.

Separating the unit, which gets 13.6 billion euros in annual revenue from x-ray scanners and blood diagnostics, would allow Europe’s largest engineering company to focus on energy technology and industrial automation. Even with the stock rising 20 percent since the last CEO was ousted following missed forecasts and writedowns on deals, Siemens’s valuation trails the median for industrial companies, according to data compiled by Bloomberg. There’s a desire to simplify the 166-year-old company with its 60 sub-units, and even spinning off just hearing aids or diagnostics would help, said Commerzbank AG.

Smaller Siemens

“It would make a lot of sense to spin it off,” Kristian Falnes, a money manager at Stavanger, Norway-based Skagen AS, said of the health-care business. It would be logical to have a “smaller and more focused Siemens going forward. There are still -- despite the great share price appreciation they’ve recently had -- conglomerate discounts related to the shares.”

The Skagen Global fund, which Falnes manages, has 5.3 billion euros in investments, including Siemens shares.

Kaeser hasn’t yet decided whether he will split off the health-care unit because he’s still in the early stages of reviewing which businesses to keep or sell, one of the people said.

Alexander Becker, a spokesman for Munich-based Siemens, said the company doesn’t comment on speculation.

The shares declined as much as 1.2 percent today and were trading down 1 percent at 94.68 euros as of 10:05 a.m. in Frankfurt. That trimmed the gains this year to 19 percent, valuing the company at 83.3 billion euros.

Loescher Ouster

Siemens expanded its health-care division in 2006 and 2007 as it sought to bolster the diagnostics business and narrow the gap with General Electric Co. The company spent about 11 billion euros on the acquisitions of Diagnostic Products Corp., Bayer AG’s diagnostics unit and Dade Behring Holdings Inc.

Three weeks after joining as CEO in July 2007, Kaeser’s predecessor Peter Loescher agreed to pay 5.1 billion euros for Dade Behring. The acquisition was criticized by investors as too costly, and it failed to perform and led to a writedown, the first of several deals that damaged his reputation. He was ousted in July.

Kaeser, 56, has spent his entire career at Siemens, including seven years as chief financial officer. He wins plaudits from investors for his communication skills and efforts to sell underperforming businesses as well as his experience managing several of the company’s units.

Kaeser told reporters yesterday that he couldn’t yet comment on his future strategy since it’s still being decided. Kaeser plans to unveil his strategy in May.

Infineon, Osram

“If there are businesses which we believe have little or less or decreasing synergetic value to our company, we may as well consider selling them,” Kaeser said when asked in a Bloomberg Television interview yesterday if he would consider selling the health-care business. “But the focus is about innovation, about organic growth, it’s about technology, and then also about making good on the economic prospects.”

Siemens has separated itself from major businesses in the past: the bulk of its telecommunications assets, on which the company was founded in the middle of the 19th century; its semiconductor business renamed Infineon Technologies AG; and the Osram Licht AG lightbulb maker this year.

Kaeser won’t likely have many qualms about making similar decisions, according to London-based Credit Suisse Group AG analyst Simon Toennessen.

Electrification Roots

“I’m sure he will go ways which are not easy and which are a bit more drastic, so you can never rule it out,” Toennessen said in a phone interview. “I don’t think it’s something imminent, it may be something in the future.”

The health-care business may not fit in with the “electrification” value chain that Kaeser has said is the DNA of the company, Toennessen said. Health care represented 18 percent of revenue in the most recent fiscal year, the fourth-biggest sector by sales, after energy, infrastructure and industry.

Siemens sealed the 640 million-euro sale of parts of its water technologies business to New York-based AEA Investors this week and is also seeking buyers for its baggage and package handling technology businesses.

The health-care unit’s enterprise value is about 24.1 billion euros as part of Siemens, according to the average of analysts’ estimates compiled by Bloomberg. They estimate its valuation would appreciate by 3.3 billion euros to 5 billion euros were it to be spun off, ranking it as one of the 10 biggest health-care companies in Europe, data compiled by Bloomberg show.

Health Valuation

Siemens has a total enterprise value of 97 billion euros.

A spinoff of the health-care business would be a “decisive step,” Societe Generale analysts Gael de Bray and Sebastien Gruter said in a Sept. 6 research note. It would eliminate Siemens’s conglomerate discount and enable the company to be more focused, they wrote.

While an IPO or spinoff could unlock value and health care may not fit Siemen’s engineering roots, losing the division’s higher profit margins would dilute the overall company’s profitability.

“If you’ve a long-term interest in a robust business model which can cope with numerous cyclical business, then as a shareholder you should want to retain a certain conglomerate character to the business,” said Boris Boehm, who helps manage about 1.4 billion euros, including Siemens shares, at Aramea Asset Management. “In the short-term it could solve problems, but then what remains left over?”

Profit Push

After a push to reduce costs in recent years, the division’s margin was 15 percent for the 2013 fiscal year, the highest in the company.

Siemens, which yesterday reported fourth-quarter earnings that beat analyst estimates, intends to raise its profit margin to about 10 percent of sales next year from 7.6 percent in 2013, Kaeser said at a press conference. The company had earlier this year abandoned a target for 12 percent profitability, a failure that led to Loescher’s ouster.

Still, Siemens’s health-care business faces higher competition from lower-cost Asian competitors such as Samsung Electronics Co Ltd. and Mindray Medical International Ltd., according to Societe Generale’s de Bray.

One possibility for Siemens is to divest the diagnostics division and the smaller hearing-aids unit while retaining the rest of the health-care operations, according to Frankfurt-based Commerzbank analyst Ingo-Martin Schachel. In August, Bloomberg News reported that the former CEO of the hearing-aids business was trying to persuade Siemens to sell the unit to a private-equity firm.

Smaller Divestitures

“There is a desire to make Siemens more slender, so on that level a spinoff of the whole health-care unit would make the most sense,” Schachel said by phone. “But at a time when Siemens has a great deal more to do strategically, a first step of spinning off the hearing aids or diagnostics units would be the most helpful.”

Even after its recent stock gain to 95.66 euros yesterday, Siemens trades at about 1.1 times its revenue in the last 12 months and 19 times earnings, both of which are lower than the median multiples for industrial companies with market values exceeding $1 billion, according to data compiled by Bloomberg.

Similar-sized health-care companies trade at a median price-sales ratio of 3.1 and price-earnings multiple of 24, the data show.

“It seems to me that the trend right now is to become more focused,” Walter Todd, chief investment officer at Greenwood Capital Associates LLC, which oversees about $950 million including shares of Siemens rival GE, said in a phone interview. “It’s worth going down that road and seeing how the market might react or value that health-care piece.”

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