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After Siemens, lightbulb-maker to shine

Reuters Breakingviews delivers agenda-setting financial insight. Its global correspondents react to stories as they develop, delivering sharp and provocative commentary on big financial news as it breaks.

Osram is switching itself on to independence. Siemens AG, which has held this global lighting company as a subsidiary to date, will relinquish control of 80.5 per cent of the company. The demerger will occur via a distribution of shares to owners of the former parent.

The deal looks beneficial for both sides. Siemens gets rid of a cyclical and capital-intensive business. Osram, debt-free, focused and freed of the conglomerate's bureaucracy, should find it easier to adjust to a rapidly changing market.

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To illustrate the market shift, step inside the new Mercedes S class. It is the world's first car without a single lightbulb: it is stuffed with 500 light-emitting diodes (LEDs) instead. McKinsey expects the LEDs to steal 66 per cent of the market by 2020, up from 15 per cent in 2011.

As the LEDs take hold, however, and industry capacity comes on stream, prices are falling. Analysts at Berenberg say they are dropping by between 10 per cent and 15 per cent a year. The ramifications have left large holes in Osram's finances. It still makes three-quarters of its sales with conventional, non-LED technology but operating profit margins of about 10 per cent, common in the last decade, are history. Indeed, in 2012, the company lost €378-million ($512.8-million) on sales of €5.4-billion.

Osram is turning, though. It is reducing headcount by 20 per cent and is closing or selling 11 of its 43 plants. This, it is hoped, will cut costs by half a billion euros. Beyond 2014, management eyes operating profit margins of 8 per cent, driven by Osram's strong market position in LED technology.

Siemens values Osram at €3.2-billion, about 4 per cent of its own market capitalisation. Berenberg reckons it might be worth a bit more, and says that a share price of €38.2 would be justified. This implies a forward EV to EBIT multiple of 9.5, a modest discount to listed peers.

As well as convincing investors that Osram has the ability to respond to its changing market, Osram has an additional challenge. Many of Siemens' institutional investors are focused on blue chips and have little interest in a mid-cap stock that does not pay a dividend this year. Osram might well shine in new-found independence. But it may take time to find its brighter future.

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