Siemens’ sale of mobility division raises questions for minority shareholders

In a notification to the stock exchanges on Wednesday, Siemens Ltd said it plans to sell its mobility division (which houses businesses linked to transport) along with the rail traction drives business and the mechanical drives business to its parent, Siemens AG or a wholly-owned subsidiary.

The news certainly did not go down well with investors, although the negative reaction may have been exacerbated by the dull sentiment on the Street. The Siemens stock closed about 4% lower at Rs1,199.15.

Actually, the board’s decision need not have surprised anyone on the Street. One may recall that a few months ago, Siemens AG and its French competitor Alstom SA came together to combine their complementary strengths in the mobility segment through a special joint venture company. Perhaps the global move was to combat growing competition between the two entities in the field and from China’s CRRC Corp. Ltd, a strong force to reckon with.

Even so, the decision to sell the business in the Indian outfit certainly raises questions for the minority shareholder.

First, this is the second such move in a short span of two years. In March 2016, Siemens sold its domestic healthcare division to a wholly-owned subsidiary of the parent firm, citing global restructuring and preference for locally manufactured products versus imported ones by firms such as Siemens, as key reasons. Why sell another profitable division to the parent yet again?

Second, the mobility division and mechanical drives business together account for about 16% of the total revenue. Apart from stable revenue growth, the mobility division’s Ebit (earnings before interest and tax) margin has been expanding over the last three years—from 3.8% in fiscal year 2014 (FY14) to 7.6% in FY17.

Importantly, given the central government’s increasing focus on building railway infrastructure, analysts had anticipated this segment to bring in good orders, revenue and profit at least a year or two hence. Doesn’t the sale therefore deprive the minority shareholders of growth prospects in the company?

In fact, when the healthcare division was sold, the parent firm had said that the decision and capital raised by Siemens would help better allocation to other areas, of which mobility was also a part. On the one hand, these multinational global firms enjoy superior valuations that are well above those of their local peers and on the other, they send such inconsistent messages.

Such moves leave the minority shareholder wondering if businesses once nurtured and viable could anytime be taken off their plate and moved to the parent’s, impacting growth prospects.

According to John Perinchery, an analyst at Emkay Global Financial Services Ltd, “While there is little the minority shareholder can do to reverse the decision, there is room to demand a one-time premium compensation for sale of the business that has good growth prospects.”

Recall that in the case of the healthcare division, the sale consideration was around 45 times the Ebit in FY15. Siemens’ shareholders were mollified by distributing half the sale proceeds (net of long-term capital gains and dividend distribution tax) through a special dividend.