Siemens announces a controversial divestment

The Company, has approved selling it’s low voltage motors and geared motors businesses (forming part of the Digital Industries business) to Siemens Large Drives India Private Limited, (a subsidiary of Innomotics GmbH, which in turn is a subsidiary of Siemens AG), as a going concern on a slump sale basis, with effect from 1st October, 2023.

  • The divested business recorded revenues of Rs. 1,061 cr and profits of Rs. 132 cr during FY ended September 2022.
    • It accounted for 7% of total revenues and 9% of Siemens India total profits during FY 22
  • Consideration for the transaction is fixed at Rs 2,200 cr
  • This implies a sales multiple of 2.1x, EBITDA multiple of 15.5x and  P/E of 16.7x
  • Valuation has been arrived on the recommendation of the independent valuers
  • Proceeds of the sale (net of tax) would be distributed to the shareholders as a special dividend
  • The transaction is subject to shareholders’ (minority included) approval

Rationale for the transaction

In line with the parent company’s global strategy of strengthening it’s position as a leading technology company and divest other businesses.

Siemens AG is carving out the low voltage motors and geared motors business, into a legally separate company. This is based on Siemens AG’s decision to form Innomotics, an integrated provider of motors in large drives. Effective 1st of July 2023, the carve out in Germany will be completed and Innomotics GmbH will operate as a legally separate and independent company within the Siemens group.

Subsequently Siemens will review options regarding the future ownership of Innomotics – including public listing as well as strategic/ financial investors.

What is the controversy in the transaction?

Valuations when one compares it with Siemens India’s own prevailing valuations.

Siemens India is currently trading at 7.5x of sales, 63x of EBITDA and at a P/E of 75x.

Optically, it does seem that a part of business has been divested at much lower valuations benefitting the parent and against the interests of the minority shareholders.

Is that really the case?

The fact is – when one looks at the standalone transaction valuation, it seems ok. 15.5x of EBITDA is no less valuation given the nature of the divested business. Any independent valuer will only suggest a fair valuation and will not base on what the main company is currently trading at.

However, minority shareholders are also right to feel cheated. A part of their ownership is getting sold at an optically lower valuation. They are bound to feel aggrieved.

Can this be taken as a Corporate Governance lapse on Siemens?

Purists will say Yes.

However, in my view it may get overlooked quickly given the underlying tailwinds in the sector and Siemens own strengths to capitalise on the opportunity.

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