Siemens Buys Rolls-Royce Energy Asset to Catch Up With GE

Siemens AG agreed to buy some Rolls-Royce Holdings Plc energy assets for $1.3 billion and plans to list its hearing-aid unit as Europe’s largest engineering company aims to close a profitability gap with rivals General Electric Co. and ABB Ltd.

Siemens will buy Rolls-Royce’s energy aero-derivative gas turbine and compressor business to strengthen its position in the power generation and oil and gas industries and manage its health-care business separately, the Munich-based company said in a statement yesterday. The measures will boost productivity by about 1 billion euros ($1.4 billion) a year, starting from the end of fiscal 2016.

Chief Executive Officer Joe Kaeser is overhauling the 167-year old company’s 60 units that make everything from trains to medical scanners to strengthen profitable energy and industry automation businesses. Today, he reported quarterly earnings that missed analyst estimates on more charges at Siemens’s power transmission unit. Kaeser’s predecessor, Peter Loescher, was ousted after cutting profit targets five times in his six-year tenure amid costs for mismanaged projects.

“The second-quarter is disappointing, largely because of the project charges in transmissions,” said William Mackie, a London-based Berenberg Bank analyst. “It will take some time to complete all of these problematic projects, so until that is the case, there is an element of same old Siemens.”

Portfolio Gap

As part of the Rolls-Royce deal, Siemens will pay the London-based company an additional 200 million pounds ($340 million) over 25 years to get exclusive access to aero-turbine technology in the 4- to 85-megawatt power output range. The turbines with an output below 66 megawatts fill a gap in Siemens’s product portfolio.

Kaeser, 56, is also preparing an offer to buy parts of Alstom SA’s energy businesses to counter a $17 billion bid by GE. Siemens’s proposal will probably entail swapping some of its rail assets for Alstom’s energy division and creating two European leaders in the fields, people familiar with the matter have said. Siemens would become one of the world’s largest manufacturers of equipment for power plants and electric transmissions.

“There was some sort of one-sided offer which we heard about and conveyed our interest that it would be in the best interest of the shareholders to look at the asset,” Kaeser said in an interview today. “So far we’ve got what we wanted.”

Same Access

The German company has asked Alstom to give it the same access to its books as GE before it makes a formal offer. Kaeser today said a joint deal with GE, under which both companies would buy different Alstom assets, would be too complex.

To add energy expertise, Royal Dutch Shell Plc executive Lisa Davis will join Siemens’s management board on Aug. 1 with responsibility for power operations. Michael Suess will stepp down from a similar role “for personal reasons and by mutual consent” and with immediate effect.

Siemens today said income from continuing operations before taxes rose 21 percent to 1.61 billion euros in the fiscal second quarter. The average estimate of six analysts surveyed by Bloomberg was for 1.78 billion euros. Sales dropped 1.9 percent to 17.5 billion euros while orders declined 13 percent. While business in 2014 will remain ‘challenging,’’ the company still expects order intake to outpace sales, it said.

The stock rose less than 0.1 percent to 93.99 euros as of 9:13 a.m. in Frankfurt today, valuing the company at 83 billion euros.

Unlocking Value

Kaeser said Nov. 7 he wanted to boost Siemens’s profit margin to about 10 percent of sales in 2014 from 7.6 percent last year, to catch up with more profitable rivals. Abandoning a 12 percent goal in July broke Chairman Gerhard Cromme’s patience with Loescher, prompting his ouster.

The separate management of the health-care business will give that segment the necessary flexibility to operate in the medical technologies market, the company said yesterday.

“Healthcare will no longer have the same go-to-market strategy as the rest of Siemens, while legal and support functions will also be completely distinct,” said Ben Uglow, an analyst at Morgan Stanley. “While this is not a full legal carve-out per se, it is a major step in that direction.”

Health-Care Separation

Kaeser would be able to unlock value by splitting off the health-care division, according to analysts. Siemens received proposals from investment banks about an initial public offering or spinoff of the health-care unit, two people familiar with the matter said in November.

While it’s the most profitable of the German company’s current main sectors, the health-care operations would be valued more highly as a standalone entity and deliver almost 5 billion euros for Siemens investors, according to 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 even more on energy technology and industrial automation.

“There is some simplification -- that the health-care is going to be separately managed suggests it’ll be either IPO’d, spun out, sold or swapped,” Nicholas Heymann, a New York-based William Blair analyst who rates Siemens market perform, said by phone.

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 last year.

Metals Venture

Kaeser has already secured the sale of a majority stake in the VAI Metals Technologies unit. Mitsubishi-Hitachi Metals Machinery Inc., a company majority-owned by Mitsubishi Heavy, said today it’s forming a joint venture with Siemens’s metals technologies division in January 2015. Mitsubishi-Hitachi will hold 51 percent of the new company and Siemens the remainder.

Siemens has also agreed to sell the airport logistics business to a consortium led by billionaire investor Wilbur Ross, and is evaluating a divestment of the microbiology unit, people familiar with the plans have said.

Kaeser said yesterday he’ll unwind Siemens’s existing four sectors into nine divisions. Loescher introduced the sector structure after his appointment in 2007 in an effort to impose a framework on Siemens’ scores of businesses. A fourth sector, dubbed infrastructure and cities, was carved out in 2011, adding to energy, industry and health-care sectors.

Kaeser has said Siemens will select projects more carefully and the company delivered the first four trains of a 16-strong order from German rail operator Deutsche Bahn AG in December. Charges for delays to the project have trimmed hundreds of millions of euros from profit since 2011.

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