Good morning, ladies and gentlemen. This is Moritz Gmeiner. I am very happy to welcome you to this morning's conference call on the exciting news that we shared with you yesterday evening. Alexander Everke, our CEO, and Michael Wachsler, our CFO, will lead you through the key points of what we announced yesterday, and that will then be followed by a question and answer session. Please note that this question and answer session only covers questions pertaining to yesterday's announcement, and we ask you to limit your questions to that. With that, I would like to hand over to Alex. Please go ahead.
Yeah, thank you, Moritz. Good morning, ladies and gentlemen. I'm Alexander Everke, CEO of ams, and I'm pleased to welcome you to today's conference call on creating the global leader in sensor solutions and photonics through our proposed acquisition of OSRAM Licht AG. As you will have seen, we have submitted our proposal for an all-cash takeover offer for OSRAM Licht AG at the price of EUR 38.5 per share. Before talking about the proposed transaction, let me first take you through some of the background and the steps related to our proposal. As part of our Q2 earnings announcement on the 23rd of July, we defined the criteria under which we would reevaluate a potential acquisition of Osram. Previously, we had entered into a standstill agreement with Osram on the 4th of June in order to gain access to due diligence as customary in these circumstances.
Last night, we have submitted our proposal to Osram, which addressed all of their prior concerns. Our proposal remains subject to Osram waiving the mentioned standstill agreement, which whilst hinders ams today, we expect this to be waived and to launch a takeover offer by August 15th. In parallel, we look forward to agreeing a business combination agreement with Osram as soon as reasonably possible. Let's now move to page four, presenting the highlights of the transaction. Subject to Osram waiving the standstill, we intend to launch a voluntary public offer for Osram at the price of EUR 38.5 per share. The combination of ams and Osram creates a global leader in sensor solutions and photonics. Through a combination of the two business, we expect to create significant value from cost and revenue synergies with a pre-tax annual run rate in excess of EUR 300 million.
We have secured committed financing in the form of a €4.2 billion bridge facility, which will be partially refinanced through a fully underwritten €1.5 billion or around CHF 1.6 billion equity issue. As part of our proposal, we have provided Osram with a draft business combination agreement, which includes comprehensive protective measures for the employees of Osram. Moving to the next page. The proposed acquisition of Osram fulfills all five criteria we have defined for larger transactions as set out in our Q2 results announcement. The transaction is strategically compelling as it creates the global leader in sensor solutions and photonics for consumer as well as automotive, industrial, and medical applications. Together, we will command the broadest portfolio of optical sensing and photonics in the industry, covering the widest set of applications with a focus on new growth markets.
This exciting position is based on leading IP on both sides, which we will combine and leverage into innovative solution, creating customer value and subsequently profitable growth. We are convinced that the transaction is value-enhancing given cost and revenue synergies with an expected annual pre-tax run rate of more than EUR 300 million. The transaction is accretive to our EPS from the first year post-completion, and we expect the returns from the transaction will exceed our cost of capital for the second year after completion. The transaction can be implemented with a sustainable capital structure, which translates into a pro forma-based leverage of 4.3 times net debt to expected December 2019 EBITDA, excluding any synergies, and 3.2 times net debt to expected December 2019 EBITDA, including expected synergies. This will be followed by an expected rapid deleveraging to reach two times net debt to expected EBITDA by 2021.
The expected level of leverage from the combination stays very well below our historic maximum leverage of ams. The transaction also fits with our financial model as the combined business is positioned to generate double-digit revenue growth and supporting our adjusted EBIT margin in excess of 25%. Let me now guide you through why this is strategically compelling. The combination creates a global leader in sensor solution photonics. Accelerates ams to win in new breakthrough optical solutions. Expedites the diversification of our revenue mix. Enhances our manufacturing footprints, creating scale and cost advantages. Leverages the complementary go-to-market strengths of the two companies. Last but not least, delivers significant synergies. The next slide has a quick overview of Osram's business. If you look across Osram's business, we see optosemiconductors and automotive as the two areas we want to invest and grow, representing the core of Osram's heritage.
The digital business we regard as non-core for ams. This division comprises of strong individual business. We are confident to identify the best owner who will invest into its future growth. Let me now run through details of the strategic rationale. The transaction creates a global leader in sensor solution and photonics. This combination of ams and Osram builds the most holistic offering for optical solutions in consumer, automotive, industrial, and medical markets. With this transaction, we will greatly enhance our sensor solutions and photonics platform in terms of performance, size, and cost. This builds up the trend that sensors and light sources are increasingly packaged into one solution, comprising emitter, optical path, receiver, and driver ICs with embedded algorithm and application layer software.
The two companies follow a complementary path in this space. The combined position of ams and Osram will allow us to fully capitalize on this market trend. We will be able to offer bespoke solutions for all target applications across the areas of illumination, sensing, and visualization. To earliest illustrate these application areas, illumination encompasses a wide spectrum from automotive lighting to 3D sensing, laser illumination, and biosensing light sources. Sensing brings together an expanding range of optical solutions across consumer and non-consumer markets. An example, display sensing, 3D sensing, in-cabin sensing, industrial imaging, consumer health sensing, and medical imaging. Visualization incorporates very new ways of creating miniaturized displays for consumer and automotive use. We will offer a full solution capability as a strong leader across the optical sensing and photonics markets.
At the same time, our complete coverage of applications will drive best performance, size, cost efficiency for our combined customer base. Moving on to the next slide. The transaction accelerates ams to win in new breakthrough optical solutions. With the combination, we bring together technologies that will allow us to realize strategically relevant innovation. We will create products that others cannot do because they lack the combined technology knowhow and IP. In next generation of consumer and automotive applications, we will drive the introduction of MicroLED displays. We are able to combine these with a range of sensor technologies into one integrated solution. This way, we can achieve a seamless integration of displays and sensors, enabling highly innovative device designs. The technology will be applicable for displays in smartwatches, in-car applications, and small screen hardware in industrial uses.
In autonomous driving, we will grow in lidar solutions with the VCSEL and edge-emitting laser-based offering, which allow us to serve broader customer needs. We can leverage front and rear lighting system as lidar hubs, which means that we incorporate small-scale lidar system in vehicle lighting assemblies, thereby freeing up significant space and enabling new car designs. In digital automotive lighting, we will capitalize on miniaturized light projectors, which enables new exterior and interior lighting solutions for more comfort and higher safety. These include light carpets around the car and new ways of visualization information to other traffic participants. In the area of micro projection, we will be able to offer new imaging solutions for augmented and virtual reality glasses and head-up displays in automotive.
In biosensing our personal health, we create biosensing solutions on the skin and in the ear using mid-infrared tunable lasers and related detector solutions to take on the challenge of non-invasive glucose monitoring. Looking at the next slide, the transaction expedites diversification of revenue mix. The combination will significantly diversify our revenue mix going forward, translating into a more balanced and marginally de-risked earnings and cash flow position. Pro forma for the contribution from Osram, our revenue mix will shift from a current split of approximately 75% consumer to approximately 35 consumer and 45% automotive. We will enhance the profile of our business by accelerating diversification and expanding in automotive, where growth is driven by market penetration of a few features rather than car volume growth. Whilst we will reduce customer concentration consumer, we will grow by continuing to deliver on Android opportunities. On the next page.
The transaction enhances our manufacturing footprints with scale and cost advantages. We want to invest and innovate in the European front-end location, which are Regensburg and Graz. Specifically, we intend to consolidate the front-end LED production and development in Regensburg. We also want to accelerate MicroLED process development, combining the capabilities we have in Regensburg and Graz. This will result in meaningful job creation opportunity across manufacturing and engineering, particularly in Regensburg. We also intend to consolidate the Asian manufacturing footprints, where three large new sites were established in recent years. This includes evaluating and exploring the consolidation of backend LED production Asia, and we will explore the streamlining of our combined manufacturing footprint in that region. There is capacity available for significant growth, which will require very limited CapEx spend. Now we move on to the next page. The combination leverage complementary go-to-market strengths.
Both companies' go-to-market strengths are strongly complementary across end market verticals. We will be able to create an unmatched coverage of these markets, where ams brings intense customer relationships with all leading mobile and consumer OEMs and all major medical imaging vendors. Osram, on the other hand, has intense customer relationships with automotive OEMs and industrial clients, and includes an automotive sales force of more than 230 people. Together, we are best positioned to serve our combined customer base in all markets. Moving to the next slide. The transaction delivers significant synergies. We expect the combination to result in significant cost and revenue synergies with a total pre-tax run rate of more than EUR 300 million per year by the third year post-completion.
In terms of costs, we expect to save more than EUR 120 million by consolidating the front-end LED production in Regensburg, the back-end LED production in Asia, and optimizing our Asian production footprint. In terms of OpEx, we expect to save more than EUR 120 million by aligning corporate functions, including marketing and branding, integrating IT functions and systems, and by focusing and leveraging R&D programs across both ams and Osram. In terms of revenue synergies, we expect EUR 60 million in the short term from leveraging our go-to-market synergies and significantly higher revenue synergies in the longer term from accelerating roadmaps for new solutions. We expect that we will realize the clear majority of these benefits in the first two years post-closing and incur costs of approximately EUR 400 million to implement these steps. Very importantly, let me emphasize that the transaction is attractive to all Osram stakeholders.
For shareholders, the transaction provides a very attractive opportunity at a 33% premium to the unaffected 2nd July price, a 10% premium to the private equity offer, and a 22% premium to the last closing price on Friday, 9th of August, with fully committed financing on board. For the workforce, we will provide commitments to protect the workforce and production plants in Germany with a focus on investing in Regensburg and ensuring there is continued investment innovation in Germany. Moreover, we intend to enter into a location safeguarding agreement, Standort-Sicherungs-Vereinbarung, to protect all German manufacturing sites for a period of three years. We also commit that pension plans will remain in place. This transaction is also attractive for Osram.
We accelerate the standalone photonic solution strategy, unlock further investment in the key growth areas, and combine technology expertise from both companies, offers tangible benefits, and continued delivery of advanced solutions to Osram's customers. For the digital division, we will find the best owner to invest in the business and drive growth for those activities. Last but not least, we commit to retain the brand and Munich as a key location for corporate functions with a meaningful presence. With this, I will hand over to Michael to address financial and other aspects of the transaction.
Thank you, Alex, and good morning, ladies and gentlemen. Also from my side. It's a pleasure for me to give you more details on the financial implications of this transformational transaction. We have fully secured committed financing for the transaction via a bridge facility from HSBC and UBS in the amount of €4.2 billion. We intend to redeem this bridge facility via a €1.5 billion or roughly CHF 1.6 billion equity issuance, primarily in form of a rights issue, which has been fully underwritten by HSBC and UBS. The balance of the bridge facility we plan to refinance in the debt market via several instruments, primarily bonds. We've also secured a €450 million revolving credit facility, which is commensurate with the larger size of the combined business and which will be in place at closing. The overview on the right-hand side shows the structure in some more detail.
Let me jump to the next page, where we demonstrate that this transaction is fully aligned with our target of a sustainable capital structure. With the proposed financing structure, we expect a pro forma leverage level of 4.3 times net debt to expected EBITDA without any synergies based on estimates for December 2019. Alternatively, a lower 3.2 times net debt to expected EBITDA if you factor in pre-tax run rate synergies of EUR 300 million. However, when a transaction is expected to close, we believe the leverage ratios will be significantly lower, well below four times net debt EBITDA. This resulting leverage shows our ability to structure a sizable transaction without compromising financial prudence, and we obviously stay lower than our historical maximum.
Post-closing, we expect a rapid deleveraging of the balance sheet based on a strong cash flow that will let us reach our midterm leverage target of below 2 times EBITDA within two years after completion. We see this positive dynamic as a testament to the strength of our proposal and our solid, well-founded approach to the transaction. Regarding our view on capital allocation, following significant investment cycles at both companies in the past few years, we expect CapEx to sales levels of less than 10% in the medium term, whilst M&A will remain built around technology. Moving to the next page, let me take you through the timeline. As Alex already mentioned, we have submitted our letter yesterday and expect the launch of the offer on the 15th, conditional upon Osram's waiving the standstill agreement. The offer period is expected to commence before the 5th of September.
We plan to have an extraordinary shareholders meeting in Q4 2019 to authorize the planned rights issue. Based on this, we expect closing of the transaction the first half of next year, subject to regulatory clearance. With that, I would like to hand back to Alex. Thank you.
Thank you, Michael. Let me emphasize that today's announcement builds on our successful track record of technology-led M&A. Over the last few years, we have radically transformed the business and have not been afraid of larger changes to do so. We have tripled our revenue in three years. Our credo has been and remains simple. We buy technology, not revenues, with the objective of strengthening our position in key verticals and applications. Through this, we enable further differentiation of our products and solutions. The acquisition of Osram is a continuation of exactly this theme, which has helped us to achieve a strong track record in M&A and growth for the company. On the basis of that, let me summarize today's presentation. We are convinced that the new ams will be even stronger and more valuable company for all stakeholders.
We will be a global leader in sensor solutions and photonics through addressing all disruptive megatrends and become an approximately EUR 5 billion revenue company. We will drive innovation based on our combined portfolio, which will offer significant value to customers. We will benefit from a balanced exposure across end markets. We will realize profit growth for all stakeholders, and to do so based on a sustainable capital structure for the company. With this, I would like to thank you and open the floor for questions.
If you would like to ask a question, please press star one on your telephone keypad. If you change your mind and wish to withdraw your question, please press star two. You will be advised when to ask your question. The first question comes from the line of Andrew Gardiner from Barclays. Please go ahead.
Good morning, gentlemen. Thanks for taking the question. My first one is just sort of around the, I suppose, the deal mechanics and perhaps some of the recent history. I'm just wondering what has changed since the May-June timeframe. You guys highlighted some of the different contact that you'd had with Osram back in May. That didn't go the distance and they had agreed by early July with the private equity bid. Today, the deal you're announcing looks on the face of it to be quite similar. The price is the same as the one that Osram had released. I'm wondering, what is different with today's bid relative to the discussions you were having with them back in the May-June timeframe? Alex, you mentioned specifically that this deal addresses some of the prior concerns that Osram had had.
Can you give us a bit more details there with your answer as well? Thank you.
Yeah. Hi, Andrew. This is Michael. Happy to take your question. As you know, Osram raised some concerns about our proposal at that time, and it would have been clearly premature to engage in a transaction on that basis. Now we have a comprehensive proposal in place which addresses all those concerns in full and is highly attractive. Last but not least, it's fully financed. Clearly this is why we are here today.
Well, at that point of time you mentioned the whole plan was not ready, and as Michael said, we managed this in the last few weeks, and that's why we're ready to announce this, and we did it last night.
Okay. You haven't sort of mentioned it, so I think I probably know the answer, but has there been any reaction from Osram overnight or this morning?
We are open to have a very constructive discussion with them, and we reach out to them.
Okay. Then just finally, a quick clarification, if I could. The synergies that you're talking about, the EUR 300 million? Would that include all of the existing synergies that Osram themselves are targeting on a standalone basis for the transformation, or is that sort of EUR 300 million on top of that?
No, we have identified the synergies based on what we have done, based on our homework. They have been validated by external consultants, so we feel very comfortable with that. Those are clearly on top of what the company’s planned on its own.
Okay. Thanks, guys.
The next question comes from the line of Sébastien Sztabowicz from Kepler Cheuvreux. Please go ahead.
Yeah. Hello. Thanks for taking my question. You mentioned that Osram fits well with ams' functional model, and you target a double-digit revenue growth midterm. Could you help us understand the assumption behind that, as it seems that Osram was more growing three%, five% organic during the midterm?
Well, the structure of the business as we look at, focusing on the optosemiconductor and automotive, combined with technology we have, addressing new market segments and creating new products, we believe, and we are convinced, to deliver a double-digit growth for both companies together.
Okay. Can you help us understand what is the size of the business that should be disposed or phased out once you have completed the deal? Do you anticipate to keep the traditional auto lighting business within the perimeter?
Well, the digital business is around 900 million EUR, so we're talking about that size. For the automotive, we plan to have optosemiconductors and automotive and looking how we optimize both business together with the portfolio of ams.
Okay, thank you.
The next question comes from the line of Sebastian Growe from Commerzbank. Please go ahead.
Yes, good morning, and thanks for taking my questions. It's three overall. The first one would also be around the deal specs, and I would be interested in if you have been in contact with any significant shareholder of Osram, say larger than 3% holding, and aware of their support for your bid so far. The second question is on the suggested DI exit. Can you confirm that this is not included in the EUR 300 million synergies target? Can you also comment on what costs you would see related to that business exit, given its burning cash of about EUR 50 million per year? The very last question is then also on the EUR 400 million integration cost that you referred to. Can you give us a sense how these are going to be allocated?
I.e., what is particularly, I think, related to the footprint enhancement in Asia and what other areas we should be conscious of, and can you also confirm that this EUR 400 million cash charges, or how should we think about that? Thank you.
Let me take one question. The exit of the digital business is not included. Let me take a question with regard to the shareholders. Obviously, we're in close contact with our investors and shareholders. There may be well an overlap. Clearly we haven't talked about this transaction with someone else. Yeah. Then, sorry. Then about the EUR 400 million integration cost. This is something we believe is conservative. We think if there might be the one or the other piece needed, and I think about especially on the IT side, need systems to be aligned and so on and so forth. We feel very comfortable with that number.
The EUR 400 million should be considered cash costs really, yeah?
Yes.
Yes.
Okay. Because you said on the DI exit, it's not included in the synergies, but on the potential exit and the point that I made before, that it's really cash burning, obviously, and has been for quite a while now, can you give us any color on how your thinking around that particular exit might be?
Well, it might be definitely positive, and something we will look at as soon as we are further on in that transaction.
Okay. Thank you so far.
The next question, please.
Apologies. The next question comes from the line of Michael Foeth from Vontobel. Please go ahead.
Yes. Good morning, gentlemen. I have a question regarding the statement you make that you expect the deal to be value accretive after two years. In your calculation, could you just help us maybe, what is your cost of capital assumption in there, and what is your tax rate assumption in there? Just to help us understand on what basis you're calculating the value accretion. Thank you.
Yeah. It's Michael. First of all, we said it's going to be accretive in the first year, not in the second year. It's going to be double digits.
No, sorry. I was referring to the fact that your return on invested capital.
Yes, more than 10%.
is expected to be above the cost of capital after two years.
The deal is expected to be accretive in the first year on an EPS basis.
Yeah.
The return on invested capital is expected to be larger than 10%.
Okay. Thank you.
That's in the second year.
Yeah.
That's maybe the Yeah.
Okay. Are you ready to go to the next question?
Yes, please.
Okay. This comes from the line of Robert Sanders from Deutsche Bank. Please go ahead.
Yeah, good morning. The first question is just on the auto business. A large part of the value capture in this deal is, aside from synergies, is from this business returning to historical margins. I was just wondering what makes you certain that the auto LED business is not structurally impaired from maybe greater competition, from the likes of Nichia or others? Is it rather that you think this business has got a lot of losses from the consumer LED business that is deteriorating? My second question would be on the Kulim business, Kulim fab, sorry. What is the long-term plan for this facility? I think Osram planned to invest EUR 1 billion in that site. I think they've invested maybe 40% so far. Would be interested to hear how that fits in with your Singapore sites.
Then lastly, would you actually consider working with a PE type investor, working together, and sharing the value creation, or would you really prefer to go it alone? Thank you.
Thanks for the question. On the first one, I think it comes down to the right product mix and the right application where we drive it more into your automotive business. We don't consider general lighting as the key for us. It's more to creating products in applications where you can differentiate with your technology. That's, as you know, ams did for the last few years very successfully. Of course, the combination of the IP related to LED and MicroLEDs from Osram, combined with our sensor technology, will create high margin, differentiated products as we did for ams. That's why we strongly believe that the financial parameters will be met, as we have indicated. The question on Kulim. As mentioned, we will move the LED front-end manufacturing to Regensburg.
We have demonstrated, to give you a reference, as ams, that we are able to manufacture very profitable differentiated products in Europe, in our case, in Graz. We intend to do the same with the Osram site to do the manufacturing for more differentiated products in Regensburg. This creates a different margin profile than in the past. On the back-end side, we will put a footprint together where we consolidate manufacture site from Osram and ams in the best possible way. These are details which will be worked out, but we create a manufacture footprint in Asia, which drives better cost position with the technology and efficiency.
To your PE question, we would generally be open to look at all options. This is something we can consider later in the project, but we certainly don't need it.
Thank you.
Next question, please.
Do apologize for the delay. This next question comes from the line of David O'Connor from Exane BNP Paribas. Please go ahead.
Great. Good morning, gentlemen. Thanks for taking my question. Maybe firstly, in case any bidding war emerges with the Ampersand's private equity offer, how much headroom is left there, Michael, that you would be comfortable taking leverage? That's my first question. Second question on the post synergies for Osram. What kind of EBIT margin can you achieve for Osram? Just a small bit, just for clarification on some of the language used in the release, given that Osram is structurally lower on the margins, do you see getting to that 25% level of adjusted EBIT post synergies? Thanks.
Yeah. I think we put a very attractive proposal on the table, and that's something that all I want to say to that. With respect to the profitability of the combined business, as Alex said before, there are very, very attractive opportunities out there. We clearly believe that this fits perfectly into our portfolio, and together we can achieve operating margins north of 25%.
Thank you.
The next question comes from the line of Sandeep Deshpande from JPMorgan. Please go ahead.
Yeah, hi. I just want to understand, Osram has a legacy lighting business in halogen and xenon and replacement light bulbs, and that is a key cash cow at the company. Is the intention of ams to continue running that business, and has the management taken a look at that business given that business will be declining over a period of time? Secondly, I'm not sure I understand your consolidation of manufacturing plants. Exactly what is happening at Singapore? Singapore facility, front-end manufacturing stays and Regensburg stays, but you are not going to continue with Kulim. Is that the plan going forward? Thank you.
To start with Kulim, as I mentioned before, we create a footprint in Asia. We did three large-scale footprints in Asia in the past. The intention is to consolidate the LED backends manufacturing in Asia and also explore streamlining of combined Asia manufacturing footprints. We're looking at all the locations we have in Asia as a combined entity, and we'll optimize this footprint in the best possible way to drive cost efficiency.
Okay. Hello?
Yeah. Regarding the first question, the lamp business, we continue the Osram plan as indicated by Osram.
Are you ready to go to the next question?
Yes, please.
Okay. This comes from the line of Charlotte Friedrichs from Berenberg. Please go ahead.
Hello. Thank you for taking my question. I just have one. Is it possible for you to lower your minimum acceptance condition from 70% to a lower number, or does your financing structure prevent you from doing that currently?
We're confident that with this attractive proposal, we get to the 70% threshold level.
Do you have the possibility to go lower, or is that not possible?
We cannot comment on that.
Okay. Thank you.
Okay. The next question comes from the line of Sebastian Growe from Commerzbank. Please go ahead.
Thank you so much for taking my follow-up question. It's just around the standstill agreement once more. If you can give us some more color on what is required to waive that very standstill agreement. Are there any formal criteria that need to be met? If so, what are these? If not, is it just a pure discreet management decision on behalf of Osram's executive board? Any color in this regard would be much appreciated. Thank you.
It's just a decision which Osram can take.
Interesting. Okay. Thank you.
Next question, please. As there are no further questions at this point, we would like to thank you very much for joining us this morning and giving you an update on the proposal that we have announced yesterday evening. We hope to update you as we continue this process on a regular basis, and thank you for your kind attention. Thank you very much, and have a good day.