Offer Price: €38.5
Expiration date: TBD (one offer expires on 5th of Sep 2019)
This idea was shared by Ilja.
A €3.5bn merger arbitrage case in Germany with two interested buyers. Target company trades at 11% spread to the latest all cash offer.
German lighting systems and opto semiconductors provider Osram Licht is facing headwinds from the weak automotive industry (half of its revenues). After two profit warnings and subsequent share price deterioration last year, the company became a takeover target.
In beginning of July Bain & Carlyle private equity groups made a joined €35/share all cash offer to acquire Osram, and the board quickly agreed to it. Over the next month OSR shares traded at a narrow 3% spread to the offer price, but the spread widened to 12% last week after Osram largest shareholder (Allianz with 9% ownership) opposed the transaction due to low price and markets began to doubt whether the 70% acceptance requirement will be reached to close the acquisition.
Just 3 days later strategic buyer - Apple sensor supplier ams AG - resurfaced (back in July ams indicated it is not interested in continuing the discussions with Osram) with €38.5 all cash offer and Osram management announced intentions to start negotiations. It is not yet clear whether management, shareholders and regulators will agree with the ams AG offer. There are also doubts whether ams will proceed with the offer even if all the other hurdles are cleared - company backed-off one time already, plenty of press coverage saying it might be value destructive for ams (acquisition is expensive, transaction over-leverages the company and payoff depends on questionable synergy targets). ams shareholders seem to agree as ams AG stock dropped by 10% after announcement.
So that's the situation we are in now - two interested buyers, one financial and another strategic, number of hurdles to clear for both parties and 11% spread to the latest offer from ams. There is a clear risk that both transactions might fail, however, this is compensated by large spread and potential for a higher bid from Bain & Carlyle.
The downside to pre-announcement price is 17% but might turn out to be larger due to weak Q3 results and rumors on potential acquisition already circling in the media since end of 2018.
- July 3: Bain & Carlyle makes a binding offer at €35/share.
- July 5: OSR board accepts the offer.
- July 15: ams AG makes an indicative proposal at €38.5/share. The offer is subject to $4bn financing which has not been arranged yet - equivalent to AMS market cap at the time. OSR management comments that the possibility for the offer to materialize was rather low.
- July 16: ams AG pulls the plug on the offer explaining that “following an evaluation of recent developments AMS does not see a sufficient basis for continuing these discussions”. The reason for this back down is not provided.
- July 23: ams AG says it was approached by certain financial partners and “exchanged views which confirm its belief that ams can arrange prudent and committed financing for this potential transaction”. The company also decides to re-evaluate the potential transaction with Osram.
- August 7: major OSR shareholder (9%) AllianzGi expresses their dissatisfaction with Bain & Carlyle offer. Two days later certain minor shareholder joins AllianzGi’s opposition.
- August 11: AMS makes binding all cash offer at €38.5/share. OSR enters into negotiations.
Bain & Carlyle Proposal and AllianzGI Opposition
Bain and Carlyle are both highly credible private equity firms. Rumors of their interest is Osram started back in 2018. The consortium was created in Feb'19 and the eventual offer was quickly approved by the board. Neither financing nor regulatory approvals appear be of issue. However, requirement of 70% shareholder acceptance ratio (which apparently cannot be lowered due to the external financing and capital structure requirements) might pose serious problems in getting the transaction closed.
The main opposing shareholder (Allianz with 9% ownership) has reportedly acquired its stake at €40-€60 per share levels and might simply be anchoring to this pricing. Despite accusing Osram board of having too little confidence in the business AllianzGi seems to be reducing OSR stake themselves - in July they had 10% ownership, while the recent letter reference only more than 9%. Also it is not yet clear if they will really vote against Bain and Carlyle acquisition - the letter reads "AllianzGI is minded not to accept" instead of a clear "will vote against".
Bain & Carlyle offer acceptance deadline is set for the 5th of Sep 2019.
ams AG is an Austrian sensor solution provider that reportedly generates almost 50% of its revenue from providing 3D optical sensors for Apple. Recently it has been looking for technology based tuck in M&A as a part of their strategy.
AMS has many times noted that their interest in Osram is technology based and indeed OSR opto semiconductors are described as “crucial elements for sensor technology” (OSR annual report). Given the apparent strategic fit (more details on that in the recent PR) as well as the fact that financing is now in place (bridge loan underwritten by HSBC & UBS), I think the risk of them pulling the plug again is rather low.
The possibility that OSR management will reject their offer also seems low. AMS was welcomed by OSRAM back in May 19’, when the bidder approached the management to explore the basis for the acquisition. Even when AMS made the initial indicative offer with no financing arrangements, Osram still decided to engage and allow due diligence. Also on the latest offer Osram board quickly started negotiations despite standstill agreement forbidding ams to make another takeover offer after backpedaling in July.
The main hurdle that I see is regulatory approval (not an issue with Bain & Carlyle proposal). Both companies are competitors in certain sectors (particularly in 3D identification technology and VCSEL semiconductor lasers), however it seems that the overlap should not be that significant as Osram has only entered this market recently with seemingly small Vixar acquisition (reportedly $1m in annual revenues).
AMS said it is ready to make an official offer by the 15th of August. However, before that the 12-month standstill agreement made in the beginning of June as a precondition to due diligence must be lifted by OSR. Negotiations are already taking place and I don’t think there will be any problems with that.
AllianzGI has not yet made any comments on ams bid.
Lightning manufacturer Osram was spun out of Siemens in 2013. Since 2015 it has sold its traditional lamps business and started moving towards a more higher technology based markets. As a part of reorganization in June 18’ the company has also sold their luminaires business and currently is continuing to focus on opto semiconductors (42% of revenues). Osram is facing lower demand from the struggling automotive industry. Last year the company has issued two profit warnings and has seen its net income drop 37% from fiscal year '17 to ‘18. The most recent Q3 results were not inspiring - revenues down 15%, adj. EBITDA falling 57% and EBITDA margin narrowing from 15% to 7% QoQ. According to the CEO (Q3 call), markets showed no signs of short term recovery.
Given recent lackluster results it is unclear where OSR shares would trade if both acquisition offers fail.
For the opposing view on why this spread of 11% is not worth the risk, I refer you to this post:
The reason is quite simple: in my opinion we have now a very different different situation with the following new issues:
- I do not know these AMS guys at all
- they had already pulled their offer once
- the AMS offer is clearly more hostile, Osram management might oppose it as they might not get the same deal that the PEs offered them. I am not an expert on “standstill agreements” but this seems to be the first hurdle
- the AMS offer will take a lot longer to close even if successful (antitrust etc.)
- However for me the tipping point was the fact that AMS shareholders clearly didn’t like the deal with their stock losing almost -10% yesterday
Yes, there is clearly a small chance that the PEs will increase their bid but overall this new situation is too hard to handicap for me at the moment.