Sale of Siemens' Energy Segment: A Disservice to Minority Shareholders?

October 18, 2024 (MLN): Minority shareholders of Siemens (Pakistan) Engineering (SIEM) are facing a troubling development as the company prepares to sell off its most lucrative business segment—the energy division.

In a recent notice to the exchange, the company's board has, by majority vote, approved the sale and transfer of the segment in question. To note, Siemens AG holds ~74.65% stake in Siemens (Pakistan) Engineering.

This segment, often described as the "cash cow," has consistently generated robust revenue growth in recent years and played a critical role in the company’s bottom line.

To highlight the share of the energy segment’s topline in total revenue is ~65% between FY19-9MFY24.

Despite its strong performance, the energy segment is being sold to the sponsor company at a price-to-book value of just 1.0x, a move that has raised serious concerns among minority shareholders about the fairness and transparency of the transaction.

The energy division, unlike the company's other business segments, has shown significant growth and profitability, making it a vital component of the company’s overall financial health.

The energy segment’s revenue CAGR between FY18-FY23 stands at ~15%, compared to the flat topline of the smart infrastructure and digital industries segment during the same period.

One of the most pressing concerns is the lack of competitive bidding for the sale. The energy segment is being sold directly to the sponsor company without considering other potential buyers, leading to inadequate price discovery.

Furthermore, the price of Rs17.8bn compared to the book value of Rs17.61bn doesn’t account for any goodwill as Siemens is a global name and holds significant brand value and competitive advantage in securing public and private contracts.

Another crucial factor to consider is the prospects of the energy business, which appear promising. One of the major obstacles to Pakistan’s sustainable growth is the lack of investment in domestic energy infrastructure, particularly in the transmission and distribution sectors.

Moving forward, the country needs to invest in this sector, especially under the IMF’s guidance and with support from multilateral institutions.

This presents significant growth opportunities for the energy division of Siemens. However, with the spin-off, minority shareholders who have invested in the company will no longer benefit from this growth trajectory.

Therefore, their compensation should reflect the present value of these future opportunities.

Furthermore, there has been no guidance from management on how they plan to utilize the funds from this transaction.

After the spin-off of the energy division, the remaining assets will hold limited economic value, raising concerns about the company's future direction.

The sale of the energy division is not only stripping the company of its most profitable asset but also casting doubt on the fairness of the entire transaction. Without competitive bidding and a proper valuation that includes goodwill, the deal appears to benefit the sponsor company at the expense of other shareholders.

Silence of management:

Mettis Global raised these issues with the company’s management and requested a response, but the silence from Siemens Engineering regarding the sale of its energy segment is increasing.

The management has yet to provide any responses to questions sent, leaving shareholders in a state of uncertainty about the future direction of the company.

Role of SECP:

The Securities and Exchange Commission of Pakistan (SECP) should devise comprehensive policies aimed at protecting minority shareholders.

With companies often dominated by a controlling stake of 75% or more, there is a heightened risk of decisions being made without adequate consideration for the interests of smaller investors.

By implementing robust regulations and guidelines, the SECP can ensure that minority shareholders have a meaningful voice in corporate governance and that their rights are upheld in the decision-making process.

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