M&A Announcement

Aug 12, 2019

Good morning, ladies and gentlemen. This is Morris Kmayner. I'm very happy to welcome you to this morning's conference call on the exciting news that we shared with you yesterday evening. Alex Avicker, 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. So with that, I would like to hand over to Alex. Please go ahead. Yes. Thank you, Moritz. Good morning, ladies and gentlemen. I'm Alex Everker, 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 List AG. As you will have seen, we have submitted our proposal for an all cash takeover offer for Osramlichterge at the price of €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 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 June in order to gain access to Trederringis as a 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 us from waiving dimension stencil agreement, which whilst hinders AMF today, we expect this to be waived and to launch a takeover offer by August 15. In parallel, we look forward to agreeing a business combination agreement with Osram as soon as reasonably possible. Let's now move to Page 4 presenting the highlights of the transaction. Subject to Osram waiving the standstill, we intend to launch a voluntary public offer for OSRAM at a price of €38.5 per share. The combination of AMS and Otsun 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 €300,000,000 We have secured committed financing in the form of a €4,200,000,000 bridge facility, which will be partially refinanced through a fully underwritten €1,500,000,000 or around CHF 1,600,000,000 equity issue. As part of our proposal, we have provided OSAM with a draft business combination agreement, which includes comprehensive protective measures for the employees of Osram. Now 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 announcements. 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 commence 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 €300,000,000 The transaction is accretive to our EPS from the 1st year post completion and we expect the returns from the transaction will exceed our cost of capital for the 2nd year after completion. The transaction can be implemented with a sustainable capital structure, which translates into a pro form a 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 2 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 solutions for tonics, accelerates AMS to win a new breakthrough optical solutions, expedites the diversification of our revenue mix, enhances our manufacturing footprint, creating scale and cost advantages leverage the complementary go to market strength of the 2 companies and last but not least, deliver significant synergies. The next slide has a quick overview of Osram's business. If you look across Osram's business, we see Opto Semiconductors and Automotive as the two areas we want to invest and grow, representing the core of OSRAM's heritage. The digital business with regard as non core for MS. This division comprises of strong e2digital business and 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. This 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 costs. This builds up the trends that sensors and light sources are increasingly packaged into one solution, comprising emitter, optical pairs, receiver and driver ICs with embedded algorithm and application layer software. The 2 companies follow a complementary path in this space, so the combined position of AMS and Ostrom 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 illustrate these application areas, illumination encompasses a wide spectrum from automotive lighting to 3 d 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, 3 d 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 accelerated AMOS to win a 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 know how and IP. In next generation of consumer and automotive applications, we will drive the introduction of micro LED displays. We are able to combine these with a range of sensor technologies into 1 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 industrial users. 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 lighter hubs, which means that we incorporate small scale lighter 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 heads up displays in automotive. In biosensing, our personal health, we create biosensing solutions on the skin and in the ear using MIDS infrared tunable lasers and related detector solutions to take on the challenge of non invasive controls 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 derisked earnings and cash flow position. Pro form a for the Contribution Home Essam, 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. While we will reduce customer concentration in consumer, we will grow by continuing to deliver on Android opportunities. Now on the next page. The transaction enhances our manufacturing footprint with scale and cost advantages. We want to invest and innovate in the European front end location, which is 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 Gras. This will result in meaningful job creation opportunity across manufacturing and engineering, particularly in Regensburg. We also intend to consolidate the Asia manufacturing footprint where 3 large new sites were established in recent years. This includes evaluating and exploring the consolidation of back end LED production in 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 leveraged complementary go to market strength. 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 in industrial clients and includes an automotive sales force of more than 230 people. So together, we were 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 pretax run rate of more than €300,000,000 per year by the 3rd year post completion. In terms of costs, we expect to save more than €120,000,000 by consolidating the front end LED production in Ravensbruck, the back end LED production in Asia and optimizing our Asian production footprint. In terms of OpEx, we expect to save more than €120,000,000 by aligning corporate functions, including marketing and branding, integrating IT functions and systems and by focusing and leveraging R and D programs across both AMS and Osram. In terms of revenue synergies, we expect €60,000,000 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 1st 2 years post closing and incur costs of approximately €400,000,000 to implement these steps. Now and 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 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 Regisburg and ensuring there is continued investment innovation in Germany. Moreover, we intend to enter into a location safeguarding agreement Stantoz Sicungsver Einbauung to protect all German manufacturing sites for a period of 3 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 investments in the key growth areas and combined 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. And 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 €4,200,000,000 We intend to redeem this bridge facility via €1,500,000,000 or roughly CHF1,600,000,000 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 €450,000,000 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 form a leverage level of 4.3 times net debt to expected EBITDA without any synergies based on estimates for December 2019 or alternatively, the lower 3.2 times net debt to expected EBITDA if we factor in pretax run rate synergies of €300,000,000 However, the transaction is expected to close. We believe the leverage ratios will be significantly lower well below 4 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 tonnes EBITDA within 2 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 and A will remain built around technology. Now moving to the next page, let me take you through the timeline. As Alex already mentioned, we have submitted our letter yesterday and expect to the launch of the offer on the 15th conditional upon OSRAM's waiving the standstill agreement. The offer period is expected to commence before 5th 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 in the first half of next year subject to regulatory clearance. And 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 and 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 3 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 huge further differentiation of our products and solutions. The acquisition of Opsgen is a continuation of exactly this theme, which has helped us to achieve a strong track record in M and A and growth for the company. On the basis of that, let me summarize today's presentation. We are convinced that the new MS 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 €5,000,000,000 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. And 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. And 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 Ausram back in May. Clearly, that didn't sort of go the distance and they had agreed by early July with the private equity bid. Yet today, the deal you're announcing looks on the face of it to be quite similar, at least the price is the same as the one that Osram had released. So 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? Also, Alex, you mentioned specifically that this deal addresses some of the prior concerns that OSRAM had had. Can you give us a bit more detail there with your answer as well? Thank you. Yes. 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. So now we have a comprehensive proposal in place, which addresses all those concerns in full and is highly attractive. And last but not least, it's fully financed. So clearly, this is why we are here today. Sorry. Well, and at that point of time you mentioned, the whole plan was not ready. And we 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. Can you you haven't sort of mentioned it, I think I probably know the answer, but was it 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. And then just finally a quick clarification if I could. The synergies that you're talking about €300,000,000 would that include all of the existing synergies that Osram themselves are targeting on a standalone basis for the transformation? Or is that is sort of €300,000,000 on top of that? No, we have identified the synergies based on what we have done, based on our homework. And they have been validated by external consultants. So we feel very comfortable with that. But those are clearly on top of what the company planned on its own. The next question comes from the line of Sebastian Dubowitsch from Kepler Cheuvreux. Please go ahead. Yes, hello. Thanks for taking my question. You mentioned that Ofgem fits well with MH Financial Model and you target the low digit revenue growth midterm. Could you help us understand the assumption behind that as it seems that Ofram was more growing 3%, 5% organically in the midterm? Well, the structure of the business as we look at focusing on the opto semiconductor and automotive combined with technology we have addressing new market segments in creating new products, we believe and we are convinced to deliver a double digit growth for both companies together. Okay. And 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? And do you anticipate to keep the traditional auto lighting business within the perimeter? Well, the digital business is around €900,000,000 So we're talking about that price. And for the automotive, we plan to have opto semiconductors 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 Graf from Commerzbank. Please go ahead. Yes, good morning and thanks for taking my questions. It's 3 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. And second question is on the suggested digital exits. Can you confirm that this is not included in the €300,000,000 synergies target? And can you also comment on what costs you would see related to that business exit given it's burning cash of about €50,000,000 per year? And the very last question is then also on the €400,000,000 integration costs 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 €400,000,000 cash charges? Or how should we think about that? Thank you. So let me take one question. The exit of the digital business is not included. Let me take your question with regards to the shareholders. Obviously, we're in close contact with our investors and shareholders. And there may be well an overlap. But clearly, we haven't talked about this Yes. And then sorry, and then about the $400,000,000 integration costs, this is something we have we believe is conservative. So we think if there might be the one or the other piece needed. And I think about especially on the IT side, the systems to be aligned and so on and so forth. So we feel very comfortable with that number. But the €400,000,000 should be considered cash costs really? Yes. Okay. And then 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 you're thinking around that particular exit might be? Well, it might be definitely positive. And so something we will look at as soon as we are further on with that transaction. The next question please. Apologies. So the next question comes from the line of Michael Fruss from Vansbal. Please go ahead. I have a question regarding the statement you make that you expect the deal to be value accretive after 2 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. Yes. It's Michael. First of all, we said it's going to be accretive in the 1st year not in the 2nd year. And then we it's going to be double digit. I'm sorry, I was referring to the fact that it's that your return on invested capital, you're writing Yes. What is expected to be above the cost of capital after 2 years? The deal is expected to be accretive in the 1st year on an EPS basis. And the return on invested capital is expected to be larger than 10%. Okay. Thank you. That's in the 2nd year. So that's maybe the Yes, please. Okay. So this comes from the line of Robert Sanders from Deutsche Bank. Please go ahead. Yeah, good morning. Maybe the first question is just on the Opto 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? Or 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 Coolum business Kulim fab, sorry. What is the long term plan for this facility? I think Osram plan to invest €1,000,000,000 in that side. I think they've invested maybe 40% so far. Would be interested to hear how that fits in with your Singapore sites. And 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. Yes. Thanks for the question. So 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. And that's as you know, AMS did for the last few years very successfully. And then of course the combination of the IP related to LED and microLEDs from OSAM combined with our sensor technology will create high margin differentiated products as we did for AMS. And that's why we strongly believe that the financial parameters will be met as we have indicated. And then the question on Fulin. As mentioned, we will move the LED front end manufacturing to Regensburg. We have demonstrated as 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 OSHOM side to do the manufacturing for more differentiated products in Regensburg. And 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 side from OSAM and AMS in a best possible way. These are details, which will be worked out. But we create a manufacturing footprint in Asia, which drives better cost position and better technology and efficiency. And to your PE question, we would generally be open to look at all options. And this is something we can consider later in the project, but we certainly don't need it. Next question, please. So 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 versus private equity offer, how much headroom is left there, Michael, that you would be comfortable taking leverage? That's my first question. And then second question on the post synergies for AusRAM, what kind of EBIT margin can you achieve for AusRAM? And just a small just one clarification on some of the languages in the release, given that OSRAM is structurally lower on the margins. Do you see it getting to that 25% level adjusted EBIT post synergies? Thanks. Yes. I think we put a very attractive proposal on the table and that's something is 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. And 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 Beshbanda from JPMorgan. Please go ahead. Yes, hi. I just want to understand, I mean, Osram has a legacy lighting business in halogen and then on and replacement light bulbs. And that is a key cash cow at the company. And is the intention of AMS to continue running that business and has the management taken a look at that business given that that business will be declining over a period of time? And then secondly, I'm not sure I understand your consolidation manufacturing plants. So what exactly what is happening at Singapore? So Singapore facility and front end manufacturing stays and Regensburg stays, But you are not going to continue with Kulin. Is that the plan going forward? Thank you. To start with COLIM, as I mentioned before, we consolidate we create a footprint in Asia. We established 3 large scale we did 3 large scale footprints in Asia in the past. And we the intention is to consolidate the LED back ends manufacturing in Asia and also explore streamlining of combined Asian manufacturing footprints. And we're looking at all the locations we have in Asia as a combined entity and will optimize this footprint in the best possible way to drive cost efficiency. Yes. And then regarding the first question, the LAM business, we continue also on plan as indicated by Osram. Are you ready to go to the next question? Yes, please. Okay. So this comes from the line of Charlotte Friedrichs from Berenberg. Please go ahead. Hello. Thank you for taking my question. I just have one. So 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 effective proposal, we get to the 70% threshold level. But do you have the possibility to go lower? Or is that not possible? We cannot comment on that. Okay. Thank you. Okay. So the next question comes from the line of Sebastian Growe from Commerzbank. Please go ahead. Yeah. Thank you so much for taking my follow-up question. It's just around the standstill agreement once more. And if you can give us some more color on what is required to waive the very standstill agreement. Are there any formal criteria that need to be met? And if so, what are these? And if not, is it just a pure discrete management decision on behalf of Osram's Executive Board? So any color in this regard would be much appreciated. Thank you. It's just a decision which Osan 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.