Troubles Spinning Off the Lighting Division: General Electric Company (GE), E I Du Pont De Nemours And Co (DD)

In late February, storied German conglomerate Siemens Aktiengesellschaft’s long-standing plan to spin off its lighting division hit a major roadblock in the form of a shareholder lawsuit. However, the news of the lawsuit has actually boosted the company’s shares by a substantial margin. Since Feb. 24, the company’s stock has risen by more than 5 percent, after losing almost 10 percent during the preceding month.

Although it is too early to determine with any certainty whether this lawsuit will completely scuttle the deal, it seems fair to bet that it will delay its completion by several quarters. Unless the shareholders drop the suit during the coming weeks, it may take months to unwind. However, it is important to note that the lawsuit is being built around a seemingly dubious technicality and may well peter out without materially affecting the deal’s completion. Regardless, this complication opens up some interesting avenues by which seasoned traders and investors might be able to profit.

General Electric Company (NYSE:GE)

About Siemens Aktiengesellschaft

Siemens is an enormous conglomerate that operates in a wide variety of industries. Although the company got its start as a machinery manufacturer in the mid-1800′s, it has since diversified into electronics, healthcare, aviation, transportation, power transmission and several other areas. Its signature product lines and divisions include advanced medical diagnostic systems, health IT systems, manufacturing automation devices, operations integration systems, water distribution, and “smart grid” power generation and transmission technologies. Siemens maintains a global presence, and has recently invested heavily in telecommunications infrastructure. The company employs well over 350,000 people and earned about $6.5 billion on gross 2012 revenues of $101.7 billion.

The Deal as Initially Proposed

Siemens currently owns a little more than 80 percent of Osram, the world’s second-largest lighting manufacturer. Osram maintains a dominant market position within the Eurozone and actively competes with competitors like Phillips in other parts of the world as well.

Under the terms of the $3 billion deal, Siemens would provide each of its shareholders with a tax-free share dividend equal to one Osram share for every 10 shares that they owned. All told, it would offload approximately 60 percent of Osram and retain a stake of about 20 percent. The deal would also require Osram to cut more than 10 percent of its workforce in an effort to remain competitive with Siemens competitors like General Electric Company (NYSE:GE) . Although the company has already issued nearly 2,000 layoff notices, it finds itself unable to compete with nimbler manufacturers of more efficient and profitable CFL devices. While its management team is finally taking steps to rectify the situation, the bulk of Osram’s lighting portfolio remains “trapped” in the stagnant incandescent market.

The Pending Lawsuit and What May Happen Next

Although it would be unwise to judge the merits of the pending lawsuit in the absence of an official filing, it appears likely that shareholders will at least succeed in delaying the spin-off for some time. However, impartial observers agree that the merits of the suit seem dubious. The nine shareholders who have joined plan to assert that they could not hear what Siemens’s CEO was saying during the shareholder meeting due to a problem with the meeting room’s acoustics. As a result, they missed key aspects of the meeting and ultimately failed to register their displeasure with the proposed spin-off.

If this pending lawsuit is dismissed or settled out of court, it seems likely that the spin-off will proceed on a slightly altered timetable. Since the company’s investors have already approved the divestiture, there would be no reason for the deal to fall apart after such a dismissal.

If the suit is not dismissed, the resulting hearings could drag on for months. Even if the case is ultimately settled, such a delay could render the spin-off less attractive and disrupt Osram’s much-needed restructuring plans in the process.

Competitors and Industry Outlook

As a global conglomerate, Siemens has few “equals.” Since it operates in many of the same industries and sub-industries, General Electric Company (NYSE:GE) is probably Siemens’s closest American competitor. With roughly the same employee count, GE is about as visible as Siemens. Of course, General Electric Company (NYSE:GE) is widely perceived as “healthier” than its German counterpart and boasts a far higher market capitalization.  Also, GE has an operating margin of 12%, which is 3% greater than Siemens.  General Electric Company (NYSE:GE) has $77 billion in cash, so taking over Osram would be a very small investment.  On top of that, cash flow from operations is $31 billion annually.

Other key Siemens competitors include Delaware-based E I Du Pont De Nemours And Co (NYSE:DD) and Cargill, the privately held Minneapolis-based agricultural and materials conglomerate.  Siemens is about twice the size of du Pont in terms of market cap.  However, du Pont has the cash available to purchase Osram, with $4.41 sitting in its bank account.  Plus it has almost $5 billion more flowing in from operations annually.  Du Pont could use some changes, though, as their stock has fallen 5% in the last year.  Unfortunately, neither General Electric Company (NYSE:GE) or du Pont would likely have any interest in purchasing a distressed lighting manufacturer like Osram.  They need to focus on their profitable businesses.

The Osram deal might create some value for Siemens shareholders in the event that the lawsuit is dismissed. At the very least, savvy investors could earn a substantial premium of 10 percent or more by dumping their Osram shares after the spin-off’s completion. At the same time, those who believe that the suit might ultimately be dismissed could amplify this “dividend” trade by opening a short position in Siemens. After the dismissal announcement, the company’s stock could fall back to its pre-lawsuit levels.

In sum, the shareholder lawsuit that seems likely to delay the Osram spin-off could provide an opportunity for profit for seasoned investors. However, there are substantial risks to any trade in this rapidly evolving situation. What’s more, Osram is not a particularly strong property. As such, many investors might prefer to avoid it altogether. In any event, interested traders should keep a close eye on Siemens during the coming weeks.

The article Troubles Spinning Off the Lighting Division originally appeared on Fool.com and is written by Mike Thiessen.

Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

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