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Siemens’ Osram Spinoff Seen as Prelude to More Disposals

January 24, 2013

Siemens’ Osram Exit Seen as Prelude to More Disposals by CEO

Siemens AG’s shareholders approved plans to spin off the Osram lighting unit into a standalone company yesterday. Photographer: Chris Ratcliffe/Bloomberg

Siemens AG (SIE) shareholders yesterday approved the spinoff of the underperforming Osram lighting unit. Declining orders, rising costs and a contracting European economy will lead to more disposals.

Siemens, whose shares last year returned only one third of the German DAX benchmark index’s advance, earmarked units such as airport luggage systems, mail automation and water technology for disposal. It’s now combing through its portfolio to weed out other laggards. Europe’s biggest engineering company outlined yesterday that units making trains and low-voltage gear also fell short of their potential in the most recent quarter.

Chief Executive Officer Peter Loescher, 55, is under pressure from investors as Siemens’ returns fail to live up to the “world-class” standards the executive says he aspires to. At yesterday’s annual shareholder meeting, a top 10 investor took to the stage and likened Siemens to an underperforming soccer club as the FC Barcelona-supporting Loescher looked on.

“In the current form, Siemens wouldn’t have got past the group stages of the Champions League,” Ingo Speich, a fund manager at Union Investment, told the meeting, using an analogy frequently employed by Loescher and drawn from Europe’s top club soccer competition. “The operational development is not pleasing and margins are under pressure. Cost savings are not sufficient.”

Trailing GE

Siemens’ profitability has trailed that at competitors General Electric Co. (GE:US) and ABB Ltd. (ABBN) for six consecutive quarters, according to Bloomberg data. Earnings before interest, taxes, depreciation and amortization in the three months ended Sept. 30, the last time all three companies reported earnings for the same quarter, represented 13.2 percent of the German company’s sales, compared to 16.9 percent at GE and 14 percent at ABB.

The company said yesterday that net income from continuing operations slipped 1.4 percent to 1.3 billion euros ($1.7 billion) in the three months through December. The company had 7.8 billion euros in cash and cash equivalents at the end of 2012, a 28 percent decline from the end of September.

The results also show that the company can’t rely on orders and the economy to boost profitability. The company’s order intake declined 3.3 percent to 19.1 billion euros in the fiscal first quarter. Loescher said the European economy won’t support Siemens’ business this year.

“The mood in Europe calmed down in the second half of 2012, but economic output in the euro zone will most likely decline once again,” the CEO said at a press conference. “The economic forecasts for the U.S. are still very cautious.”

European Woes

The euro-area economy is hobbled by a recession, and unemployment in the region reached a record 11.8 percent in November. The currency bloc fell into its second recession in four years in the third quarter and the European Central Bank expects the economy to shrink 0.3 percent this year. The euro region absorbs about 40 percent of German exports.

The stock today dropped 0.5 percent to 80.29 euros as of 9:07 a.m. in Frankfurt trading, valuing the company at 70.7 billion euros.

Loescher acknowledged yesterday that Siemens hasn’t yet reached the position where it wants to be.

“Every member of the management board is committed to fulfilling our aspiration to be world-class,´´ Loescher told shareholders at the AGM.

Portfolio Check

Siemens is combing through its portfolio to make sure businesses have a clear strategy, competitive products and the potential to increase profits.

The company has ‘‘noticeable interest´´ for the water, mail and airport baggage units from ‘‘several parties´´, Chief Financial Officer Joe Kaeser said yesterday.

Siemens’ shareholders approved plans to spin off the Osram lighting unit into a standalone company. Investors receive one Osram share for every 10 Siemens shares they own. Osram posted a profit of 79 million euros in the quarter, compared with 111 million last year.

‘‘Businesses that do not fulfill our criteria will be subject to question, including whether Siemens is the best possible home for such activities in the long term,´´ Loescher said.

That revamp will probably hit the infrastructure and cities unit, formed 2011 and spanning building technology, low- and medium-voltage products, smart grids, train manufacturing and rail automation equipment. Siemens created this fourth major division to better serve municipal clients as a one-stop shop, while analysts including William Blair’s Nicholas Heymann say the strategy hasn’t yet paid off.

Amorphous Blob

At 4.8 percent, the sector’s operating profitability in the fiscal first quarter was less than half that of the energy businesses at 10.8 percent, and the only one that did not meet its profitability targets. The industry sector posted 14 percent, while health care earned more than 20 percent.

‘‘This infrastructure and cities thing is still a flashlight without any focus to the beam,´´ New York-based Heymann said by phone. ‘‘People still haven’t really figured out how they’re going to turn the corner,’’ he said, calling the sector an ‘‘amorphous blob.’’

Loescher also said yesterday he aims to make more ‘‘targeted´´ acquisitions.

‘A Disaster’

Some of the deals supervised by the CEO soured, and a push into more environmentally friendly energy generation led to spiraling costs. Profitability last year dropped back to the levels when Loescher started in 2007, prompting a new program in November to cut costs. Even with the savings push, costs rose 0.7 percent in the first quarter.

The solar energy unit was put up for sale in October, three years after its founding through acquisitions including Archimede Solar Energy and Solel Solar Systems. Deteriorating prices for photovoltaic modules have made concentrated solar power less attractive, and the activities had been unprofitable since Siemens bundled the operations into a separate unit.

In November, Loescher embarked on his biggest purchase in half a decade, saying it would buy Invensys Plc (ISYS)’s rail unit for 1.74 billion pounds ($2.78 billion) to bolster its signaling business, a price investors said is high for an asset that has shown a mixed performance track record and promises limited cost savings.

Henning Gebhardt, the head of European equities at Deutsche Bank AG’s DWS Investments unit, which manages more than 140 billion euros including Siemens shares, said he was ‘‘surprised´´ by the Invensys deal and called the company’s solar power acquisitions ‘‘a disaster.’’ The challenge for Loescher is not only to sell underperforming businesses, he also needs to buy assets at a better price, he said.

‘‘The portfolio management is absolutely not satisfactory,´´ Gebhardt said. ‘‘It may be difficult to sell assets when they are loss-making, but Siemens also struggles with its acquisitions.´´

To contact the reporters on this story: Richard Weiss in Frankfurt at rweiss5@bloomberg.net; Alex Webb in Munich at awebb25@bloomberg.net

To contact the editor responsible for this story: Simon Thiel at sthiel1@bloomberg.net


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