October 8, 2019

Breakingviews: German lighting mess has glimmer at end of tunnel

by Breakingviews.

Private equity could be the one glimmer in Osram Licht’s darkness. After Friday’s sinking of AMS’s offer for the German lighting group, potential bidders Bain Capital and Advent International are lumbered with the Austrian sensor specialist as a large minority investor. However shadowy the situation now looks, there is a way out.

At first glance, AMS’s failure to get its 41 euros a share offer over the line looks an all-round mess. The Austrian group’s stake-building in the last few weeks means Osram ends up with an uppity 20% shareholder. That in turn acts as a deterrent to a private equity swoop. And AMS misses out on a chance to reinvent itself for the driverless-car revolution, leaving it depending on Apple for 40% of revenue. Little wonder both AMS and Osram shares fell.

Yet it’s not complete lights out for Osram Chief Executive Olaf Berlien. Pointedly, his announcement of a DIY strategic turnaround reminded shareholders that buyout groups Bain and Advent were still poring over Osram’s books.

Presumably said shareholders would turn their noses up anything below 41 euros. But throwing in a 5% premium to, say, 43 euros, might win round the 49% of them who didn’t side with AMS. Management and German unions would probably lower their opposition: With a financial buyer, work representatives would retain their place on the Osram board rather than being replaced by Austrian counterparts.

Offering what would be a 49% premium to Osram’s undisturbed value as of July 2 sounds unappetising. At 41 euros, the duo would have made returns of 16.4% assuming they chucked on 1.5 billion euros of debt and managed to grow revenue by 2% and cranked up EBITDA margins from 7% to 17% by 2024, according to Breakingviews calculations. At 43 euros, those returns only drop to 16.1%. Hiking the margin to 17.2% would restore returns back where they were.

AMS’s holding is still a problem for the private equity players. But if they offer a premium it would give AMS Chief Executive Alexander Everke a chance to reverse his embarrassing stake-building fail without doing so at a humiliating loss. That would see Osram’s newly dark future brighten.

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