A Strategic Fit

Gamesa-Siemens merger creates world’s biggest wind power OEM

Challenging market conditions, price pressures, a move towards tender-based support mechanisms and competition from Chinese original equipment manufacturers (OEMs) have kicked off consolidation in the wind OEM space. The past one year has witnessed several big mergers such as those between Vestas and Mitsubishi Heavy Industries, GE and Alstom, and Nordex and Acciona. The latest merger on the list is between Spanish wind major Gamesa and German industrial conglomerate Siemens AG.

What is notable about this merger is its sheer scale. It brings together two of the world’s top five wind turbine manufacturers to create a Euro 10 billion business with nearly 70 GW in operating assets across most of the world’s major wind markets. According to FTI Consulting and Bloomberg New Energy Finance figures, Siemens and Gamesa were, respectively, the fourth and fifth largest manufacturers in 2015 with a combined market share of 14-15 per cent. This has put them in a position to surpass Vestas Wind Systems A/S and General Electric.

Further, the new company, which will be consolidated in Siemens’ financial statements, will have an order backlog of around Euro 20 billion, revenue of Euro 9.3 billion and an adjusted earnings before interest and taxes (EBIT) of Euro 839 million.

While clean energy installations worldwide have marked successive records in recent years, a boom in production capacity and improvements in technology have narrowed the margins for manufacturing wind turbines, especially in high-cost markets such as Europe and the US. Companies have to compete on a global scale, with the Xinjiang Goldwind Science & Technology Co. of China capturing the biggest market share in 2015. “The combination of our wind business with Gamesa follows a clear and compelling industrial logic in an attractive growth industry, in which scale is key to making renewable energy more cost-effective,” Joe Kaeser, chief executive officer, Siemens, noted in a media statement.

Run-up to the merger

After months of negotiations, on June 17, 2016 the two companies officially announced their plan to merge operations. The news did not come as a big surprise as the two companies had reportedly been in negotiations for several months. In late January 2016, the Spanish financial regulator reported that Siemens had appointed Deutsche Bank to look at the viability of a possible acquisition of its turbine manufacturing competitor. Media reports suggested that Siemens was in talks with Gamesa’s executives and Spanish utility Iberdrola, which has a 19.7 per cent share in the manufacturer.

In a note to Spain’s financial regulator, Gamesa was non-committal and stated: “In relation to the news and rumours about a possible corporate transaction between Gamesa Corporation Technology and Siemens AG, we hereby inform you that, in the ordinary course of its activity, the company regularly analyses the various strategic opportunities presented for the group.”

A key reason for the delay in finalising the deal was concerns linked to Adwen, the existing offshore joint venture (JV) between Gamesa and Areva. Adwen had contracts to build seven wind farms off the French and German coastlines. However, after months of negotiations, Gamesa said that Areva had decided to waive its contractual restrictions to allow the deal to progress.

Terms of the deal

According to the terms of the deal, which is subject to shareholder and regulatory approvals, Siemens will receive newly issued shares of the combined company and will hold 59 per cent of the share capital while Gamesa’s existing shareholders will hold 41 per cent. This includes Iberdrola, which will retain an 8 per cent stake in the new company.

As a part of the merger, Siemens will fund a cash payment of Euro 3.75 per share, which will be distributed to Gamesa’s shareholders (excluding Siemens) immediately following the completion of the merger (net of any ordinary dividends paid until the completion of the merger). The cash payment represents 26 per cent of Gamesa’s unaffected share price at market close on January 28, 2016.

Additionally, Gamesa and Areva have entered into contractual agreements, whereunder Areva has waived existing contractual restrictions in Adwen, simplifying the merger between Gamesa and Siemens. As a part of these agreements, Gamesa, in alignment with Siemens, has granted Areva a put option for the latter’s 50 per cent stake and a call option for Gamesa’s 50 per cent stake in Adwen. Both options will expire in three months. Alternatively, within this time, Areva can divest 100 per cent of Adwen to a third party via a drag-along right for Gamesa’s stake.

Related to this, there have been rumours that GE may be considering taking on the business as it is looking to grow its European market share following its takeover of Alstom’s power business in 2015.

Taking all these developments into consideration, the deal is expected to close by March 2017. The new company will have its legal domicile and global headquarters in Spain. The onshore business will operate from Spain while the offshore business will remain at Siemens’ bases in Germany and Denmark.

Synergies

Siemens and Gamesa expect a significant synergy potential in a combined set-up as the two companies are highly complementary in terms of their global footprint, sub-segment specialities and technologies. Geographically, Siemens has a fairly strong foothold in North America and northern Europe. Gamesa, on the other hand, is a leading player in emerging markets such as Latin America, China and India. Gamesa was the second largest foreign OEM in China in 2015 after Vestas, and is one of the largest wind turbine suppliers in India at present. Siemens’ involvement in China, in contrast, is limited. It has a licence agreement with local manufacturer Shanghai Electric, but that is unlikely to help it gain market traction. Considering that China and India are expected to account for more than 45 per cent of all global wind power installations in the next five to ten years, the deal will not only create the best market entry for Siemens in the world’s number one and number five markets, but also provide a market share guarantee for the future.

Further, the transaction will result in a wide product offering, covering all wind classes and addressing all the key market segments to better serve customer needs. Siemens is one of the world’s biggest makers of offshore wind turbines, while Gamesa is the fourth largest manufacturer of onshore wind turbines.

However, according to some industry experts, there is considerable overlap in the product ranges of the two companies. Thus, attention has understandably shifted to the future of Adwen, which is at an advanced stage of developing a new 8 MW turbine, a direct competitor to the Siemens 7 MW unit. Further, both Siemens and Gamesa make onshore turbines that are similar in concept and capacity, including the 3.3 MW machines aimed at low and medium wind sites. Whether the new JV can justify the production and development of two different designs for the same market sector remains to be seen.

Meanwhile, the merger between Siemens and Gamesa also provides scope for synergies in areas such as research and development, production, and selling, general and administrative. In financial terms, the two companies expect annual EBIT synergies (cost savings) of Euro 230 million in the fourth year post closing. However, experts believe that achieving this target will be a challenging task, despite the synergies.

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