As the game of musical chairs being played in Siemens’ boardroom winds down, it is little wonder that speculation has returned over the future of the group’s hearing aids business. The company’s new chief executive, Joe Kaeser, should take the opportunity to split the unit off at last.
The hearing aids segment, as Siemens' only remaining business that sells directly to individuals, is an anomaly, and the firm has already put other non-core divestments in train. An attempt to sell the unit in 2010 failed, but with markets more receptive and new management possibly less entrenched, now should be the time to release the value of a high-margin business.
The 2010 buyout talks are believed to have foundered because offers failed to meet Siemens’ €2bn ($2.7bn) valuation of the division.
But the rationale for splitting off the audiology division remains simple: the group trades on a relatively low profit multiple, as would be expected for what is effectively a mixed conglomerate business; in such a set-up the value of its higher-margin hearing aids division is not being recognised.
Nothing illustrates this better than a look at the relative valuation multiples of Siemens’ peers in the audiology space – all of which are trading on much healthier multiples than Siemens. The case for divestment rests on the standalone Siemens division also attracting a similar valuation multiple.
|Mind the gap: Siemens versus its audiology peers|
|Market cap||2012 revenues||2012 EBIT||EBIT margin||Price/EBIT multiple|
|William Demant (DKrm)||28,897||8,555||1,653||19.3%||17x|
|GN Store Nord* (DKrm)||20,297||6,251||573||9.2%||35x|
|Siemens audiology division** (€m)||–||1,018||132||13.0%||–|
|*GN's hearing aids business, Resound, makes up 55% of the group total; **estimated.|
Unfortunately not enough is known about the Siemens business to attempt an accurate valuation. But Bernstein analysts estimate that its revenue amounts to 1.3% of the group total, and a conservative guess of its EBIT margin – in the region of the disclosed 13% of Siemens’s healthcare business – puts the audiology unit’s 2012 operating profit at around $130m.
To reach Siemens’s target €2bn valuation the unit would thus need only attract a multiple of just over 15x EBITDA – a discount to its peers. Since the unit has suffered from underinvestment this is undoubtedly an ambitious target, though in the current market it could be possible.
How to do it?
In August rumours started circulating that Siemens might consider selling the unit to a private equity firm, but nothing has yet come of this and private equity tends to strike when the market is low, so the timing might not be propitious.
On the other hand, a takeover by one of the other players in the industry could work. Last time around, the interested parties were believed to include a consortium including the Australian implant firm Cochlear, and with much of the interest in the space focused on the technologically advanced cochlear implants the value of more standard hearing aids should not be forgotten. Cochlear might well remain interested.
Sonova, the market leader with 24% share, might wish to ensure that it retains this position by buying the Siemens unit, although with just a handful of market players this could give rise to antitrust issues.
In this case an IPO could be the way forward or, even better, a partial IPO and carve-out to existing investors, followed by a full float later. After all, with over €6bn in the bank Siemens is hardly short of cash, but its investors would welcome a tax-advantageous transaction that hands them a hitherto under-appreciated business.
Siemens is already processing the divestments of its water treatment, parcel automation, airport logistics and air freight divisions. While this will keep it busy and could push a hearing aid sale off the table for now, it shows that the company has, like many large conglomerates, seen the advantages of streamlining operations.
If Mr Kaeser shows himself open to a sale the hearing aid business ought to attract plenty of interest – and in the current market reaching a €2bn valuation might prove less demanding than three years ago.