Siemens AG announced in March a plan to publicly list its Osram GmbH LED and lighting subsidiary in an initial public offering (IPO) planned for this fall, but recent stories in the press have suggested that Siemens may change its plans. The combination of a tough solid-state-lighting (SSL) market and weakness in the equity markets may have significantly lessened the potential IPO value.
A Reuters story published earlier this month was among the first to suggest that Siemens might delay the IPO or pursue a different strategy for spinning out the Osram unit. Analysts that had valued Osram as high as 6 to 8 billion euros ($8.6 to $11.4 billion) now expect a drop in valuation of as much as 35%.
Given that Siemens planned all along to maintain what it called a "anchor shareholder" position in the public Osram, it's worth considering why the IPO was planned. Siemens had originally said that the IPO would give Osram the "operational freedom" to grow the operation and advance SSL technology.
William Mackie, Senior Analyst Capital Goods at Germany-based Berenberg Bank has followed the situation and sees two main reasons for the IPO. He said it would "enable Osram to develop a more entrepreneurial approach to grow the business in the face of the changing business model within the lighting industry." And he said the spinout would allow Siemens to focus on its "core activities in energy, industry, and healthcare."
Prospects for the IPO
When asked if he thought the IPO would go forward as planned, Mackie said, "Under the current market conditions the likelihood of the IPO proceeding this fall has significantly decreased. We believe Siemens continues to prepare for an IPO and will make a final decision in the next 2-3 months."
The devaluation is pegged to two things. First the global economy is on shaky footing. And second, the LED and SSL business is less robust than many expected for this year. The demand for LED-backlit TVs was lower than many LED manufacturers expected and many LEDs originally destined for that market have been sold at bargain prices into general-illumination applications – even though those LEDs may be less than ideal for general illumination. There is also increasing price pressure both on LED components and SSL luminaires caused by new players in Asia.
Legacy lighting is also impacting the situation. About the leaders in the lighting business, Mackie said, "Osram, together with GE and Philips, are walking a balance between the growth of LED-related business in general lighting and the decline of some traditional lighting technologies, such as incandescent."
One option is simply waiting for the market to improve, and Mackie expects another upwards cycle. "I certainly expect another upturn in demand to emerge as adoption of LED lighting solutions in the general lighting market develops, although this is likely to occur at lower price points," said Mackie. "In the traditional lighting technologies the light manufacturers are also currently being impacted by a sharp increase in prices of rare-earth metals which is denting profitability. Siemens may indeed wait for these two factors to pass and then proceed with an IPO under better conditions."
New investments in Osram
The Reuters story discussed the need for Siemens to make new investments into Osram if the IPO is delayed for more than six months. But Osram certainly has a strong technology base and patent portfolio.
What Osram may need is money to build out an ecosystem to address the disruptive market changes caused by the shift to LED lighting. Mackie said, "The business model around selling traditional lighting technologies is under threat from LED which brings new entrants and a new sales proposition." The message is the light bulb market is going away, and Osram may need to expand its SSL luminaires business and expand the consultative sales channels required to supply SSL systems.
Osram has also been in the news quite a lot lately given its ongoing patent disputes with Samsung and LG. Does that have any impact on how the IPO proceeds? "The patent battles have been a feature of the industry for many years and are no different to past actions between other players," said Mackie. "I don't see any impact on the IPO. Ultimately this will probably be concluded with a cross-licensing agreement and a financial settlement."
LEDs Magazine asked Osram and Siemens to comment on their IPO plans, and the companies declined. Stay tuned for what will likely be an ongoing story to follow as the leaves turn.