Roadblocks Ahead of San’an Opto’s Bid for Osram

2016-10-25 15:33

Chinese LED manufacturers have been very active in international acquisitions in recent years. One of the most successful representatives in the LED lighting industry this year has been Forest Lighting (MLS) and a consortium of Chinese investors acquired Osram’s general lighting business LEDVANCE. Other Chinese investors also showed interest in absorbing the company recently, with market rumors about San’an Opto’s acquisition of Osram spreading like wildfire recently.

San’an Opto stated it is in talks with Osram, but there is still many uncertainties involved in the acquisition.

Many industry rs interviewed shared the same scenario analyses that San’an Opto’s successful takeover of Osram could expand its patent portfolio and reach in the international market. This would help it raise its global recognition, however, the success of merger negotiations will still depend on the German government’s approval.

San’an Opto initiates contact with Osram

German media WirtschaftsWochewas the first to report about San’an Opto’s interest in acquiring Siemens shares in Osram on Oct. 6, 2016.

Osram is Germany’s oldest lighting brand founded in 1919, and is one of the world’s top lighting manufacturers, standing head to head with Philips Lighting and GE Lighting.

The German lighting company is leading global LED and OLED semiconductor technology, and in the LED sector it has deployed its market strategy throughout global supply chains. San’an Opto on the other hand is the world’s second biggest LED chip supplier, ranking just slightly behind top global player Epistar, an EPI-wafer manufacturer based in Taiwan.

Shortly after the report, San’an Opto stated in a press release on Oct. 11, 2016 that it was in talks with Osram over a potential acquisition deal or partnership, and entered preliminary talks, but as of date the companies have not discussed in detail negotiation conditions including scope and prices of the contract. The two companies had not signed any binding agreements and there are still many uncertainties in the trade agreement, cooperation, and negotiation talks. In other words, San’an Opto has no intention of acquiring Osram.

Reporters from China Business Journal asked San’an Opto’s board secretary for further details about the acquisition on Oct. 19, 2016, but employees responded senior ranking company officials were in charge of the issue, and they were unfamiliar with the specifics.

Industry analysts told reporters that there was a high probability that San’an Opto would takeover Osram.

Following the rise of China’s LED manufacturers, patent deployment strategies have become a key in San’an Opto’s acquisition strategies, said LED网 Senior Analyst Figo Wang.

“There are many patents within the LED industry, but most of the core patents are in the control of Osram and other large manufacturers,” said Wang. “Chinese manufacturers that want to sell their LED chips in international markets will encounter patent issues. When a manufacturer is small it has a much smaller market share, and faces low risks because they are not considered a major threat by competitors. However, large enterprises with large market shares will become a target of patent infringements. Even though San’an Opto has a large patent portfolio, it has fallen behind large international manufacturers.”

Osram has significant advantages in lighting, LED chips and branding, which could greatly boost San’an Opto’s business, said Yun Han, a lighting analyst from China’s largest market intelligence company CCID Consulting.

“Osram’s brand has more than 100 years of history, which is very attractive for San’an Opto,” said Wang. “Even though San’an Opto’s LED business is fairly large, the company’s brand international recognition is still way behind Osram. Moreover, San’an Opto is one of China’s top LED companies with very high R&D investments, if the company acquires Osram it will be able to accelerate the advancement of its LED efficiency.”

Even though San’an Opto is a global leading LED chip company, most of its revenue and market share is from its domestic market: China.

Based on San’an Opto’s revenue for first half of 2016, revenue from Chinese market and international markets was respectively RMB 2.34 billion (US $350 million) and RMB 439 million, equivalent to a ratio of about 5.33:1.

To expand its oversea sales and scope, San’an Opto extended its reach in international markets over the past few years. For instance on June 2013, San’an Opto acquired U.S. LED company Luminus Devices with the aim of opening up the North America market. In August 2014, the company established a new subsidiary Hong Kong San’an Opto with the goal of opening up the Japanese market. To tap into the Korean market, San’an Opto, Seoul Semiconductor and Seoul Viosys formed a joint venture in December 2014.

Most industry rs agree if San’an Opto can successfully absorb Osram, it will no doubt be able to assist its expansions in international markets.

Challenges ahead

San’an Opto might acquire Osram for EUR 7.2 billion (US $8.1 billion), according to German paper WirtschaftsWoche estimations. San’an Opto’s total assets as of June 30, 2016 totaled RMB 23.14 billion, making the Chinese company appear as having eyes bigger than its stomach.

From a market perspective, San’an Opto’s finances are sufficient enough to support this acquisition. San’an Opto’s 2015 revenue reached in total RMB 4.86 billion and net profit for shareholders was a recorded RMB 1.70 billion.

San’an Opto is fully capable of financing the merge of Osram in some analysts perspectives. “San’an Opto’s finances are in perfect condition, and its annual revenue has grown steadily. Additionally, the company has received many financial subsidies from the Chinese government, so it has better financing channels than most companies, even when it encounters funding issues,” said Han.

San’an Opto’s debt ratio is a mere 27.15% much lower than many LED companies listed on China’s A-stock list.

A San’an Opto secretary told reporters: “San’an Opto’s finances are pretty solid.”

During the interview process, many industry rs pointed out the greatest uncertainty in this acquisition deal was the German government, and this concern is not without basis. After news spread about San’an Opto’s acquisition of Osram, the German Economic Ministry announced it was considering to implement new measures to prevent takeovers of high technology companies by foreign investors. Other news about the German government’s opposition to the case also emerged, and German media also noted if recent news about German Economic Minister Sigmar Gabriel is proven true, than the German government has opposed the acquisition.

A preceding case of a blocked Chinese company acquisition of a foreign company in the industry happened in January this year, when Go Scale Capital acquisition of Lumileds was halted by the Committee on Foreign Investment in the United States (CFIUS).

“San’an Opto’s acquisition of Osram will involve industrial competition between two countries, which will raise the guard of the acquired local company,” said Wang.

“Acquisitions of foreign companies has been a common policy Chinese manufacturers implemented to gain access in foreign markets. Leading international companies transforming comprehensive industrial competitiveness and gross margin provide a win-win situation for both parties involved in the acquisition deal. Nearly all multinational acquisitions will encounter a series of risks, including policy risks, enterprise management and hidden data and debt risk analyses. All these test the patience of those involved in the acquisition negotiations, their determination, and the professionalism of financial institutes acting as mediators. For the two sides of the takeover, there is no such thing as a fair industry price, most of the valuing process depends on the two companies recognition,” said Bo Geng, the Deputy Secretary-General of China Solid State Lighting Alliance (CSA).

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