Bloomberg News

Siemens Circling Invensys in Breakup Means 80% Boost: Real M&A

August 22, 2011

Aug. 22 (Bloomberg) -- Invensys Plc may be worth 80 percent more in a breakup, as Siemens AG circles the maker of software used to run the London Underground’s subway trains.

Invensys, which traces its roots back to the 1800s, has plummeted 94 percent from its peak more than a decade ago as revenue at its controls unit fell in five of the past six years. The slide deepened this year as Invensys named Wayne Edmunds its chief executive officer and analysts projected a decline in profit in 2012, according to data compiled by Bloomberg. After falling to a two-year low last week, the London-based company was valued at 1.8 billion pounds ($3 billion).

While Invensys’s pension obligations are among the largest in the U.K., the company would be worth more than 3 billion pounds by valuing its businesses separately and splitting off its retirement plan, Collins Stewart said. With Invensys moving to offload its pension liabilities, it may attract a bid from Siemens, Europe’s largest engineering company, once that plan is finalized, a person familiar with Siemens’s strategy said. A buyer would get a company whose technology is used in everything from power generation to railroads and oil refining and is cheaper relative to earnings than 95 percent of its rivals.

“There’s underlying value in their products,” Madelynn Matlock, who helps oversee $14.8 billion at Huntington Asset Advisors in Cincinnati, said in a telephone interview. “Invensys has always had some interesting businesses, but they’ve never been terribly well-managed.”

British Engineering

A spokesman for Invensys declined to comment on the prospects for a sale or Siemens’s interest.

Shares of Invensys climbed as much as 7.4 percent and closed up 4.3 percent at 231.2 pence today in London. Siemens gained 0.5 percent to 68.61 euros in Frankfurt.

The company, founded by a German-born British engineer named Augustus Siebe in 1819, was known as Siebe Plc before its acquisition of rival BTR Plc in 1999. While the deal helped Invensys almost triple in size, according to Hoovers Inc., the company has since destroyed more than 10 billion pounds in shareholder value, data compiled by Bloomberg show.

Since Invensys replaced Ulf Henriksson with Edmunds as the company’s CEO in March through last week, the stock fell 38 percent, almost triple the drop of the FTSE All-Share Index, the benchmark gauge for British common equity, data compiled by Bloomberg show.

Invensys hasn’t reported two consecutive years of per-share profit increases since at least 2005 and analysts project that earnings will drop at least 3 percent this year. Invensys has suffered stop-start growth even as its two biggest units -- operations management and rail systems -- increased sales every year since 2005, data compiled by Bloomberg show.

Pension Discount

As a result, Invensys sold for 9.9 times reported profit last week, an almost 40 percent discount to the industry average, data compiled by Bloomberg show. Based on earnings before interest, taxes, depreciation and amortization, Invensys is also cheaper than 95 percent of its U.S. and European competitors with more than $1 billion in value, the data show.

Invensys trades at a discount partly because of the size of its pension liabilities. The company has projected benefit obligations equal to three times its equity value, the most of any company in the FTSE All-Share Index with at least $1 billion in market capitalization, data compiled by Bloomberg show.

Invensys had pension obligations of 5.46 billion pounds at the end of March, 437 million pounds more than the value of the plan’s assets, according to its annual report.

Siemens, CSR

Without the pension liabilities, Invensys would attract interest from companies including Siemens and Beijing-based trainmaker CSR Corp., according to Mark Wilson, a London-based analyst at Collins Stewart.

Wolfram Trost, a spokesman at Munich-based Siemens, didn’t respond to a telephone call or an e-mail seeking comment. Calls to CSR’s Beijing office weren’t returned outside business hours.

In May, Invensys Chief Financial Officer David Thomas said he was “encouraged” by the opportunities to “remove liability” from the pension program. Last month, the Times reported that Invensys’s board planned to meet to discuss a proposal to divest its pension plan.

By separating its retirement plan and applying a buyout multiple to the earnings before interest and taxes of each of its businesses, Invensys may be worth as much as 400 pence a share, according to Collins Stewart’s Wilson.

The projection, which implies an 80 percent premium in a breakup or takeover, assumes that the pension obligations will cost Invensys about 500 million pounds to unload.

‘Our List’

Siemens, which has the most cash of any European industrial company, will weigh a bid for Invensys once its pension liabilities are resolved, said the person familiar with the matter, who wasn’t authorized to speak publicly.

“We have our list,” Peter Loescher, Siemens’s chief executive officer, said on a conference call in May, adding that he knows “exactly where” the targets are and “who they are.”

Siemens plans to fill holes in energy distribution, industry automation and applications to improve power use, Chief Financial Officer Joe Kaeser said earlier this year. He also said acquisitions may be between 1 billion euros ($1.44 billion) and 5 billion euros.

Invensys gets almost half its revenue from its operations management unit, which sells technology to automate plants and industrial facilities and helps make them cheaper to run, data compiled by Bloomberg show.

“A lot of what Invensys does is control systems and software to make production more efficient and safer -- systems that would shut down a nuclear power station in the case of an emergency,” said Felicity Smith, who helps manage about $800 million including Invensys stock, at Bedlam Asset Management Plc in London. “The name that gets batted about most is Siemens.”

--With assistance from Jacqueline Simmons and Matthew Campbell in Paris and Richard Weiss in Frankfurt. Editors: Michael Tsang, Daniel Hauck.

To contact the reporters on this story: Sabine Pirone in London at spirone@bloomberg.net; Danielle Kucera in New York at dkucera6@bloomberg.net; Joseph Ciolli in New York at jciolli@bloomberg.net.

To contact the editors responsible for this story: Daniel Hauck at dhauck1@bloomberg.net; Katherine Snyder at ksnyder@bloomberg.net; Benedikt Kammel at bkammel@bloomberg.net.


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