OSRAM Licht (OSR.DE) – Merger Arbitrage – 11% Upside

Price: €34.7

Offer Price: €38.5

Upside: 11%

Expiration date: TBD (one offer expires on 5th of Sep 2019)

Press release

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.

 

Downside to pre-announcement is 17%, but might be larger due to weak Q3 results and rumors on potential acquisition already since end of 2018.

 

Short Timeline:

  • 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 Offer

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.

 

OSRAM

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.

 

Risks

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.

14 COMMENTS

  1. work 22

    I have traded around this, both long and short. I think its important to note that the downside is significant– the large 9% shareholder, Allianz, won’t accept 35 euros. We don’t know yet if 38.50 euros is acceptable (though i’d guess Allianz would take 38.50). So if the ams bid fails, and the private equity guys are rejected or walk, the downside could take the stock to 25-30 euros.

    There could also be a bidding war between the two rival buyers, though ams had a very hard time lining up financing for 38.50 euros, let alone anything higher. And the private equity firms are contributing 70% equity, an unusually high amount for their business model (like buying a house with 70% down). So a bidding war, while possible, seems less likely. Also, ams won’t close the deal until 1H 2020, so even getting Osram board approval does not seal the deal. My point here is that there is serious risk.

  2. Writser

    I’m long too. An update from AMS today:

    https://ams.com/-/osram-update

    Premstaetten, Austria (14 August 2019) — ams (SIX: AMS), a leading worldwide supplier of high performance sensor solutions, is moving ahead in good faith negotations with OSRAM Licht AG (“OSRAM”) on a Business Combination Agreement (“BCA”), a key element of the proposal for a takeover offer announced on 11 August 2019.

    Based on the recent discussions with the Management Board of OSRAM, ams currently expects to be able to start the tender period of its offer during the offer period of the existing offer from Bain Capital and The Carlyle Group, thus before the end of 5 September 2019.

    Price will probably be higher tomorrow.

  3. Ilja

    A few updates on this situation:

    – Osram board and a majority of supervisory board are recommending ams offer stating that “financial attractiveness of the offer was to be weighted higher than points of criticism”.
    – AMS has lowered shareholder acceptance rate to 62.5% from the previous 70%.
    – Nonetheless, several strategic questions still remain unanswered and already there appears to be some opposition from labor groups who are concerned about possible job losses. ams CEO has responded that their “commitments are the same if not better than that of Bain and Carlyle.”.
    – It is rumoured that Bain&Carlyle are considering to sweeten their offer.

    https://www.osram-group.com/en/media/press-releases/pr-2019/16-09-2019
    https://www.bloomberg.com/news/articles/2019-09-16/osram-rejects-ams-s-4-1-billion-bid-sticking-with-bain-carlyle
    https://ams.com/-/egm-and-threshold-update

  4. Writser

    Rumours about Bain & Carlyle sweetening their offer have been around for weeks. But it seems unlikely to me that Bain will announce a new bid a few days before the tender offer deadline. Surely updating the prospectus with a small price bump isn’t that much work? I’d say that if they wanted to do that they could have done so already. And what strategic value is there for Bain in wating as long as possible? The longer they wait, the tighter the schedule and the bigger the chance that the AMS deal has enough pull to get over the finish line.

    As we are getting closer and closer to the October, 1 deadline it seems more and more unlikely to me that the bidding war will continue.

    Also, AMS expects the deal will be finished in H1 2020. At current prices ( ~ E37,70) I think you’d have to factor in a pretty big chance of a higher bid to get to an attractive IRR. And I don’t think that is the case anymore. A few weeks ago the price was lower and I thought the chances of a new bid were higher. All in all I sold half my position.

    Of course I could simply be wrong and there is some strategic value in waiting that I am not aware of. Or it simply takes a lot of time to determine whether to increase your bid.

  5. dt

    With only 2% upside remaining to the AMS offer and antitrust issues still pending I find it prudent to exit the position fully.

    Even if shareholder approve the merger with AMS (very likely IMHO) I would expect OSR to drop lower after it becomes clear that Bain & Carlyle are not looking to increase their offer – mergers with pending antitrust approvals usually trade at a wider spreads than 2%.

    1. work 22

      not to mention the union angst over the AMS deal, and the low (though not unrealistic) possibility that financing for the AMS deal is threatened between now and mid 2020. Bain could have theoretically raised to less than 38.50 and gotten Board approval, due to the more “favorable” nature of their bid compared to AMS’s. However, now that the Board has recommended the AMS bid (with some qualifications mind you) that seems unlikely.

  6. Alex15

    I agree, but I guess the reason for is that either profit and domination agreement or a squeeze out of OSR will follow. In case there is more visibility I would expect the share to trade higher. Also I don’t think antitrust is an issue here.

  7. Ilja

    So the situation actually got a lot more interesting.

    It was reported that Bain was actually pushing Carlyle to increase the bid, but Carlyle refused. So it seems that another private equity bidder – Advent – might join Bain instead of Carlyle. No final decision has been made yet, but an indicative offer from the new consortium has already been presented to Osram. No definitive price is stated yet, but it was noted that Bain and Advent aim to “deliver an offer price which meaningfully exceeds the offer price offered by ams AG “. I believe the price should be announced shortly and it will be interesting to see the response from ams.

    https://otp.tools.investis.com/clients/de/osram1/dgap/dgap_1/dgap-story.aspx?cid=1225&culture=en-US&newsid=13624
    https://www.ft.com/content/bc26501c-df90-11e9-9743-db5a370481bc
    https://www.reuters.com/article/us-osram-m-a-ams/advent-considering-joining-bain-in-pursuit-of-osram-bloomberg-idUSKBN1W60K9

  8. dt

    Well, I did not see this coming.

    AMS increases the offer to acquire Osram to 41eur/share even before any further news from Bain/Advent front. AMS shares drop 6% in response – market clearly thinks AMS is overpaying.

    I do not see Bain/Advent making an even higher offer. Carlyle already sidestepped -Osram is getting too expensive especially for financial buyers.

    https://www.ft.com/content/20c3b08a-e10f-11e9-b112-9624ec9edc59?ftcamp=traffic/partner/feed_headline/us_yahoo/auddev&yptr=yahoo

  9. Ilja

    Surprisingly AMS offer did not pass the threshold – they have received only 51.6% out of the needed 62.5%. Despite that, AMS has increased its ownership to 19.9% and remains committed to acquiring Osram: “We intend to leverage our position as OSRAM’s largest shareholder in a dialog with OSRAM as we continue to pursue the full acquisition of the company, securing a solid future for OSRAM”.

    According to Osram, Bain and Advent “are currently inspecting the books with a view to submitting an offer for Osram”.

    So overall, it was a nice call to exit the position before the announcement as now on Monday, I believe, shares are going to drop (at least from the aftermarket reactions it seems to 37-38 Eur/share levels). Although Bain and Advent intentions are promising, any moves will be very difficult from them now that AMS has 20% stake.

    https://www.osram-group.com/en/media/press-releases/pr-2019/04-10-2019b
    https://ams.com/-/ams-osram-offer-result

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