Last week at the Siemens annual general meeting in Munich, chief executive Joe Kaeser had a cascade of good news: almost every division of the business was delivering excellent figures. Six thousand shareholders eagerly lapped it up.
But on the subject of Healthineers, the most profitable section of Siemens’s business, Mr. Kaeser was quiet. The company’s medical-technology division is widely expected to be spun off and floated on the stock market later this year. Analysts think the new company could be worth up to €30 billion, around $32.5 billion. The new firm might even be large enough to join Siemens on the DAX, the blue-chip index of leading stocks on the Frankfurt exchange.
Mr. Kaeser had good reason to keep his plans for Healthineers under wraps. The possible spin-off could be one of the largest stock market flotations of any kind in 2017, even though Siemens will likely sell only a minority stake. Even 20 to 30 percent of the company, say bankers, would translate to between €6 billion and €9 billion. Siemens has not yet chosen the banks which will underwrite the deal. But competition will be stiff. Ultimately, commissions of €60 million to €90 million will be at stake.
Spinning off was once a rather defensive measure. But successful deals like Uniper are changing all that. Jens Maurer, Head of German mergers, Morgan Stanley
Siemens has some experience in successfully spinning off a business unit.
Since it floated its former lighting division Osram Licht, the company’s stock price has increased a healthy 130 percent. And it’s in good company. Covestro, formerly Bayer’s material science division, is now worth 160 percent more than when it was separated in 2015. Uniper, spun off from electricity power generator E.ON at the beginning of 2016, is up 26 percent. E.ON’s separation is more complicated than other spin-offs. The energy company was keen to get rid of its conventional power generation divisions – once its core business – by bundling them in Uniper in order to focus on renewables, networks and retail.
Not all spin-offs have seen the same triumphant upward march of share prices. But the positive examples are inspiring many senior German executives to think about giving divisions their independence.
“Spinning off was once a rather defensive measure. But successful deals like Uniper are changing all that,” explained Jens Maurer, head of German mergers at U.S. bank Morgan Stanley. Jens Kengelbach, a partner with management consultancy Boston Consulting Group, or BCG, said he expects many more spin offs, carve outs, and separations, above all in the pharmaceutical, technology, and automotive sectors.
Banking sources suggest that Daimler is contemplating a split with the sale of its division for heavy goods vehicles. The conglomerate ThyssenKrupp is toying with shedding its steel division, while Lufthansa is discussing a flotation of its technology business. Deutsche Bank is currently examining whether a partial flotation of its loss-making asset management division would bring enough urgently needed capital into the bank. Analysts estimate the separate value of the division at up to €8 billion, although the bank would only sell a minority stake.
The major German retail and wholesale group Metro is already a few steps further down the road. On Monday, shareholders at its annual general meeting voted to divide the company in two. The cash-and-carry division will continue under the Metro name, while the company’s electronics retailers Media Markt and Saturn are to operate as a separate company, Ceconomy.
Pushing through the measure, Metro chief executive Olaf Koch promised higher growth and an increase in share prices. Since Mr. Koch announced the plan at the end of March 2016, the company’s shares have risen a healthy 25 percent.
Such considerations are driving other companies as they contemplate similar moves. “Right now, with valuations high, it is possible to get very good prices,” said Mr. Kengelbach of BCG.
Another factor is that large investors are insisting on increasingly focused business models. “Things are not as bad as in the United States: activists and hedge funds in Germany are not yet pushing companies as hard in the direction of spin-offs as over there," said Stefan Winter, head of investment banking at UBS Germany. "But nonetheless, executives here are trying to react ahead of the game, so they don’t end up in a position where they are forced to act, rather than choosing to act.”
Highly diversified companies and conglomerates exist everywhere in the world, but they are a corporate form traditionally popular in Germany. “Their individual parts are often worth more than the company as a whole,” explained Stefan Weiner, managing director of the German securities division of U.S. bank J.P. Morgan. But these kinds of spin-offs are complex transactions, he said, usually taking at least a year to complete.
The individual parts of diversified companies are often worth more than the company as a whole. Stefan Weiner, Managing Director of German securities, J.P. Morgan
Mr. Weiner said it was important to distinguish between a carve-out and a spin-off, although the two terms are sometimes confused.
In an equity carve-out, shares of the subsidiary firm are issued to the public via an initial public offering. The parent company retains management control and a majority equity stake in the new company, while also benefiting directly from the cash generated by the sale. In a true spin-off, the parent company distributes shares of the subsidiary to its own existing shareholders, who then having holdings in two separate companies. The spin-off is a distinct entity with its own management structure.
Mr. Weiner, the investment banker, said he foresaw up to five major deals of this kind by firms on DAX index or the mid-cap MDAX index and each could generate several hundred million euros. Two or three of the deals, he said, could weigh in at more than €1 billion. The largest of all would be a Healthineer deal, he said, which could see the new company being directly accepted into the DAX.
Peter Köhler is a Handelsblatt editor in Frankfurt, reporting on banks, private equity firms, venture capital and corporate funding. Robert Landgraf is Handelsblatt's chief correspondent for the financial markets. To contact the authors: [email protected], [email protected]