Siemens India Continues To Exit, Disturbing Investor Interest!
Siemens India's share price fell by more than 10% in May, 2023, the day the market opened following the company's statement.
Siemens Limited (Siemens India), the Indian arm of Germany-based industrial manufacturing conglomerate Siemens AG, received board approval in May 2023 for the sale and transmit of its low-voltage motors and geared motors division to Siemens Large Drives India Private Limited, an entity wholly-owned by Innomotics GmbH, for INR2,200 crore.
Innomotics GmbH is a subsidiary of Siemens AG, Siemens’ ultimate parent company.
The purchase, according to management, is consistent with the Siemens Group’s global internal reorganisation.
The restructure will create a new legal company for low-voltage motors and geared motors based on Siemens AG’s decision to launch Innomotics GmbH, an integrated provider of motors and big drives.
Furthermore, the board of directors agreed to explore distributing 100% of the selling consideration as a special dividend to its shareholders, although company’s minority shareholders were unimpressed by this decision.
Siemens India’s share price fell by more than 10% in May, 2023, the day the market opened following the company’s statement.
However, market analysts are dissatisfied. They perceive this transaction as being detrimental to minority shareholders and raising corporate governance concerns.
Many brokerage companies have downgraded Siemens India, claiming that the sale is being done at a severe discount, which is plainly in the minority shareholders’ best interests.
In an analyst call in May 2023, Siemens India’s managing director and chief executive officer, Sunil Mathur, asserted that the deal value is fair and has been appraised by an independent registered valuer and reinforced by another valuer through fairness opinion.
The proposed transaction’s consideration, as suggested by the board of directors and audit committee, is based on a valuation performed by Grant Thornton Bharat LLP. According to Mathur, ICICI Securities Limited, a Category I merchant banker, has provided a fairness opinion confirming that the valuer’s appraisal of the business is fair.
In the absence of closely comparable publicly traded enterprises, the valuer looked at multiples of Indian-listed companies that operate in roughly similar industries and participate in economic activities that are partially similar to the business. The valuer accorded equal weights to the values calculated using the DCF approach and the market-multiple method. Grant Thornton, the valuer, has advised a worth of INR2,070 crore to INR2,165 crore. He went on to say that the board chose to adopt the higher end of their proposed valuation and raise it to INR2,200 crore.
Siemens India’s low-voltage motor division.
Siemens AG, a German multinational conglomerate, is Europe’s largest industrial manufacturer.
Siemens India is Siemens AG’s flagship listed firm in India. With almost 150 years of existence in India, it is a technological business focusing on industry, infrastructure, digital transformation, transportation, as well as transmission and generation of electrical power.
Siemens India’s low-voltage motor business is part of Siemens’ digital industries division, which mostly consists of motors ranging from 0.12KW to 1.25MW.
Such items are largely used in the machine-building, metals, food & beverage, chemicals, power, and mining industries.
The business segment is asset light and short-cycled in nature. Siemens manufactures low-voltage motors using an outsourced production approach. Siemens designs the motors, but manufacture is outsourced with tight quality controls across the supply chain and fabrication of the motors.
During the fiscal year ended September 2022, the business division earned revenue of INR1,060 crore and profits before interest and tax (EBIT) of INR130 crore. During the same year, this accounted for 7% of Siemens India’s revenue and 9% of its earnings.
The sum under consideration for sale is INR2,200 crore, which equates to 2.1x sales and a 15.5x EBITDA multiple, while the total Indian firm trades at 86x FY22 profits.
Analysts’ thoughts on this deal.
In its research, IDBI Capital notes that such a valuation is detrimental to minority shareholders and calls into question the company’s corporate governance as well as the reasoning for the value of the transfer, which is at such a sharp discount to the valuation of the listed corporation.
According to another brokerage report, while this is not a significant area for Siemens’ future ambitions in gearbox and railroads, it has resulted in an implied loss for investors because it was sold at a lower EV/sales.
According to a brokerage report published by China-based Haitong Securities, selling the business division on a slump-sale basis deprives current shareholders of the advantage of the greater value.
Phillip Capital’s brokerage report also emphasised that the sale of the low-voltage motor company occurred at a time when the domestic market is expanding.
According to the research, other leading companies in the sector, such as CG Power and ABB India, are solidifying their market dominance by expanding capacity and investing in motor technology for greater energy efficiency.
This is not the very first instance Siemens has sold a lucrative business unit to its parent company.
According to Navuma Institutional Equities, there is a tendency of Siemens selling lucrative subsidiaries to its German parent at reduced valuations on a slump-sale basis, which is ‘unfriendly’ to the company’s minority shareholders.
This is not the first instance Siemens India has sold a subsidiary to the parent company. In the last two decades, there have been 36 similar deals.
Siemens sold its domestic healthcare operation to Siemens Healthcare Private Limited, a wholly-owned subsidiary of the parent company, for about INR3,000 crore in March 2016. Half of the selling proceeds were given as a special dividend to the company’s shareholders.
The corporation then justified the transaction by citing worldwide reorganisation and a preference for locally created items over imported products. Siemens further indicated that after this transaction, the funds raised by Siemens will be better allocated to other business divisions with higher development potential.
Similarly, in February 2018, Siemens India divested two of its business units, transport solutions and power equipment, to a wholly-owned subsidiary of Siemens AG. Minority investors reacted negatively to this action, and the stock price fell about 6% after the business announced the deal.
Siemens India sold its mechanical drives business to Flender Drives Private Limited, another wholly-owned subsidiary of the German company, in August 2020 for INR440 crore.
Ironically, when the healthcare division was sold, Siemens’ German parent company stated that the funds obtained would allow for better allocation to other divisions, and the mechanical drives unit was one of those divisions that was sold off within two years.
The divestiture move drew criticism from analysts, proxy advice companies, and minority shareholders.
According to Shriram Subramanian, founder and managing director of proxy advice firm InGovern Research Services, the corporation has a history of short-changing minority shareholders while selling and purchasing businesses with its parent organisation. This is not an unusual example; Siemens India has already hived off and sold various company divisions to its parent. This transaction is undoubtedly detrimental to minority shareholders.
He adds that even when the corporation sold off its metals technology division in the past, they were obliged to significantly enhance the worth of the purchase when minority shareholders opposed the deal. They anticipate minority shareholders voting against it in this case as well.
According to JP Morgan’s brokerage report, the intra-group sale of the mechanical drives business values the unit at one-fourth of the company’s enterprise value and price-to-book multiple, putting minority shareholders of the Indian-listed subsidiary at a disadvantage.
According to the ownership pattern declared by the public markets, Siemens AG owns 75% of Siemens India as of March 31, 2023. Institutional investors own 15.49% of the firm, with ordinary public shareholders owning the remaining 9.51%.
Siemens has been selling off its different divisions to its German parent as part of its worldwide restructuring strategy, and the exiting business divisions do not appear to be a continuing component of the main future strategy, according to the plan. But is a slump sale the greatest option for minority shareholders to gain the highest price discovery possible?
Other alternatives include demerging the aforementioned business division into a separate listed organisation and providing existing shareholders with a stake in the new entity, or selling the business divisions to a third party and allowing market forces to determine the price.
Both of these solutions may have been more advantageous to minority shareholders. Analysts have pointed out that a one-time special dividend paid to shareholders will not be enough to compensate for the loss.
The firm, on the other hand, believes otherwise.
During the analyst call, Mathur emphasised that the main intention is not to keep these sold-off units within Siemens and eventually sell them off.
Mathur also used Flender GmbH as an example. The mechanical drives company sold to Flender Drives Private Limited was completely owned by Flender GmbH and was sold to Carlyle Group in October 2020 for EUR2 billion.
The Flender business that we acquired was subsequently sold to a third party, correct? And that is the question at the time: is there actual value for a minority stakeholder in India who doesn’t know what the future of a certain firm will be, but simply knows that it won’t remain with Siemens for long? He went on to say.
He also claimed that the sold firms will not stay with Siemens for long. It will either be ‘IPOed’ someplace else or sold to private equity investors. So, how long does a minority shareholder want to be tied down to a business that is not Siemens’ primary focus? Mathur said.
However, analysts believe that minority investors are denied the profits from eventual sales of the company to third parties.
Such transactions leave minority shareholders wondering if any Siemens business division may be spun off and sold to the parent company, depriving them of the benefits.
This transaction would require approval from both its minority owners and Sebi. Minority shareholders have two options: vote against the purchase and have it annulled, or negotiate a better valuation with management.
When the board of Siemens India decided to sell off its metals technology division to its parent firm in August 2014, minority shareholders attempted to stymie the acquisition. The value did not sit well with the minority shareholders.
Minority investors voted against it, forcing management to boost the value and offer a rewritten resolution with considerably additional disclosures, which eventually received shareholder approval.
For the time being, the deal’s destiny is in the hands of its minority shareholders.
Conclusion.
This is not the first time Siemens India has sold a subsidiary to the parent company. In the last two decades, there have been 36 similar deals. Brokerages believe that the INR2,200 crore selling price of its low-voltage motor business to its parent corporation is a severe discount, leaving minority shareholders shortchanged.
Proofread & Published By Naveenika Chauhan