A Disappointing Debut
Siemens Energy’s shares debuted on Monday at Frankfurt stock exchange, giving the gas turbines and power transmission systems maker a market cap of €16 billion ($18.7 billion), lower than the estimated market valuation of €21-€22 billion ($24.5-$25.5 billion).
Shares opened at their listing price of €22.10 ($25.87), after plunging to a low of €19.21 ($22.49) a share at one moment.
“I have repeatedly pointed out that we expect volatility to be high in the first few weeks,” said Ralf Thomas, CFO of Siemens. “It’s not a situation-specific to Siemens Energy, it’s the same with every spin-off.”
Thomas added that it would take until mid-October to understand how Siemens Energy will be valued. Siemens’ energy division’s main competitors are General Electric and Mitsubishi Heavy Industries.
The German giant went through restructuring, after which the energy unit spun off from its parent company because of weak profit margins. Siemens Energy is estimating an adjusted margin of a maximum of 1% in 2020 on earnings before interest, tax, and amortization before special items, due to the COVID-19 outbreak and shortcomings in its onshore wind turbine operations.
That figure is expected to climb to between 6.5% and 8.5% in 2023, boosted by over €1.3 billion ($1.52 billion) of cost reductions that will include the shutdown of several production factories, according to a source familiar with the matter.
The company expects sales to drop by €1.4 billion ($1.64 billion) to €27.4 billion ($32.08 billion) in 2020, before bouncing back between 2 and 12% in 2021.
At first, Siemens AG has spun off 55% of the energy unit to shareholders, but the plan involves spinning off its remaining direct stake of 35.1% between 12 and 18 months after the listing. The Siemens pension fund holds a 9.9% stake in Siemens Energy.
Siemens plans to keep a stake of about 25% in the energy division to keep enough power to stop unwanted acquisition attempts. Reuters notes that Siemens could keep that minority stake for a minimum of 5 years.
No Need to Invest Cash in Big Deals
Siemens believes there’s no need for massive takeovers to increase its size after spinning off the energy unit, the source said. It added that massive acquisitions of more than €10 billion ($11.7 billion) are not needed, even though the company has enough capital to handle such deals.
Rather than acquisitions, the company will concentrate on smaller deals and invest inside the company in fields like research and development as it’s more and more turning into a company focused on factory automation, smart buildings, and transport.
The firm also plans to spin off its mechanical drives unit Flender, after which no large spin-offs are expected, the source said. Its train making mobility unit that failed to merge with France's Alstom in 2019 will remain a vital part of Siemens' future.
A fallout of Siemens Energy is one of the last steps of Siemens’ transformation to become a more industrial technology-focused company. According to analysts, the spin-off is likely to lead to share price increase as the company is now free from the alleged conglomerate discount, which has cost the company over 25% of its stock price.
In 2018, Joe Kaeser, CEO of Siemens AG, spun off its healthcare division Siemens Healthineers, whose share price performance has substantially outshined its former parent company.
“Conglomerates can do a lot of things well, but they’re really very good at only a few of the things that will be important for the future,” Kaeser stated in July, saying they frequently result in misallocation of resources.
Shares of Siemens Energy opened lower-than-anticipated on their first day of trading on the Frankfurt stock exchange after the unit got spun-off from its parent company Siemens AG. On the other hand, the mother said there’s no need for massive takeover deals to build up size after the spin-off and said it plans to focus more on smaller deals and internal investments.
About the Author
Mariliana has an MSC in consumer analytics and business strategy. She has a special interest in fast-moving industries and big data.