Wednesday 20 February 2019

Vestager holding firm to force Siemens merger off the rails

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'Siemens will, of course, continue to find other problems to solve if the deal fails to go through.' Stock photo: Oliver Lang/AFP/Getty Images
'Siemens will, of course, continue to find other problems to solve if the deal fails to go through.' Stock photo: Oliver Lang/AFP/Getty Images

John Lynch

While all the blather about Brexit here and across the Irish Sea has been wrecking people's heads in recent months, a much more interesting story about Europe and the way things are done in the European Union has been played out in the international business pages.

It is the proposal, first outlined more than 18 months ago, that would see the German industrial giant Siemens (our target company this week) and the French group Alstom park their long-standing rivalry and merge their very extensive rail businesses.

The super-merger, the world was told, would produce a rail transportation operation with combined sales revenue of €15bn that would be a 'champion' for Europe, meeting the red-hot competition that is steaming down the tracks from China.

Both the German and French governments rowed in behind the move with bells, whistles and all flags flying. They chose to sell the proposal to the public as a rail equivalent of what Airbus was doing in the aircraft sector. The EU, however, has shown an independence of mind and an intellectual rigour that its Brexiteer critics in London might never give it credit for.

In the face of some of the most intense and sustained political pressure, the EU competition authority and Commissioner Margrethe Vestager have held firm that as far as the protection of competition is concerned, the deal fails to cut the mustard. She has sought to tweak the proposals and for her troubles she has managed to ship some heavy criticism, being labelled as 'backward' and overly technocratic by the Siemens management. She has even been accused of being technically right but doing 'everything wrong for Europe'.

The deadline for the proposal is imminent but at the time of writing, it seems that the campaign for the 'super-deal' has almost certainly been lost and the commissioner's views will carry the day. It won't be forgotten, however, down the long corridors in Brussels, which are still echoing to the sound of French voices claiming rejection is 'an economic error and a political mistake'.

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Siemens will, of course, continue to find other problems to solve if the deal fails to go through. It is massive in scale, in the number of businesses it runs and its global footprint. It offers a wide range of electrical engineering and electronic products and services. The engineering behemoth trades in 190 countries worldwide and employs 372,000 in its 280 production and manufacturing facilities around the globe.

Valued by the stock market at €81bn, it is massive corporations like this that are attracting activist investors.

Some analysts have been working the numbers and claim that if the Siemens divisions were broken up, they could be worth 80pc more than the present market value. However, one can confidently expect that German political opposition to a Siemens break-up to satisfy the whims of speculators will be a lot noisier than anything engendered in the proposed rail merger super-deal.

In fact CEO Joe Kaeser has been taking some evasive action to head-off aggressive investors and has been making tentative steps to reduce its very broad portfolio. In the past year it sold off part of its lucrative medical technology division.

To further ward off any unwanted attention, Mr Kaeser is in the process of reorganising its nine divisions into three.

In financial terms the past 12 months has been a satisfactory one for the group, even if net profits fell by almost a half in the last quarter. Revenues last year were €83bn, slightly above the prior year.

All of its business performed with the exception of its power and gas operation which continues to operate in a challenging market. Net profits were €6.1bn.

Its shares are trading just shy of €96 each, down 22pc from its yearly high. The company also incurred severance payments close to €1bn but Siemens has the ability to generate positive cash flow and free cash flow was almost €6bn. The group trades on a multiple of 18 and expects moderate growth in this financial year.

The shares are worth considering.

Nothing in this section should be taken as a recommendation, either explicit or implicit to buy any of the shares mentioned.

Irish Independent

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