Siemens spins off power and gas business as Q2 profits rise
The Gas and Power spinoff and transfer of SGRE stake would create a new “major player on the energy market” with a business volume of $33.5bn and more than 80,000 employees
German engineering conglomerate, Siemens, has announced that it will be selling off its $33.5bn majority of its Gas and Power division, made up of conventional power generation, transmission, oil and gas, and its 59% stake in Siemens Gamesa Renewable Energy.
The sale of the stake, which follows speculation about the future of Siemens’s gas business since last year, will likely see the “creation of a new “major player on the energy market.”
The company’s supervisory board announced the spinoff on May 7 as part of its Vision 2020+ strategy concept.
The board said the move would help Germany-based Siemens meet medium-term growth and profit targets by “clearly focusing its portfolio on dynamic growth markets and efficiency gains.” The company’s stock price has risen about 5% this year.
Yesterday, Siemens beat analyst estimates in the second quarter. Earnings for Siemens’ industrial businesses, a closely watched measure, rose 7% to €2.4bn, beating estimates of €2.24bn, as “most businesses” increased performance. Profit margins for its industrial businesses rose from 11.1 per cent a year ago to 11.4 per cent.
Europe’s largest industrial conglomerate said revenues rose 4 per cent to €20.9bn and that its order backlog had hit a record high of €142bn.
Net profits fell 5% to €1.9bn, however, in part because in the second quarter of last year Siemens posted a one-off €700m benefit from centrally managed portfolio activities.
“We delivered on our promises again this quarter, and even exceeded expectations in many areas,” Siemens chief executive officer Joe Kaeser said. “Now, we enter into a new era to become an even stronger and more focused Siemens.”Siemens said it was sticking to its targets for 2018-19 after a steady second quarter.
Gas and Power had the lowest profit margin of all divisions last year, according to figures that were revised to reflect the four wholly-owned units Siemens created in an April 1 reorganisation. The gas and power unit contributed €156m of profit last quarter, up 38 per cent from a year ago, though revenues fell 4 per cent to €2.8bn.
Profit at Siemens Healthineers, its diagnostics arm, rose 16 per cent to €614m. Revenues were up 9 per cent to €3.5bn and it reported “significant order growth in China”.
The Gas and Power spinoff and transfer of SGRE stake would create a new “major player on the energy market” with a business volume of $33.5bn and more than 80,000 employees, Siemens said.
The carveout will give the new company “complete independence and entrepreneurial freedom,” it said. Siemens said the new company will have a stock exchange listing by September 2020.
The Gas and Power unit had sales of 12.4 billion euros ($13.8bn) in 2018, and 377 million euros ($421mn) in profit.
Profitably has fallen year-over-year in recent years due to growth in renewable power generation and decreased sales of Siemens’ gas turbines and other power plant equipment.
Siemens, which employed 379,000 workers worldwide at the end of 2018, including about 44,000 in its Gas and Power unit, said it will create 25,000 new jobs in digital industries and smart infrastructure, including electric mobility, energy storage, and smart buildings, though job cuts in other areas will reduce the net number of new jobs to about 10,000. The company wants to cut about $2.5bn in costs by 2023.
The move will create a “powerful pure play in the energy and electricity sector with a unique, integrated setup – an enterprise that encompasses the entire scope of the energy market like no other company,” explained Kaeser.
“Combining our portfolio for conventional power generation with power supply from renewable energies will enable us to fully meet customer demand. It will also allow us to provide an optimized and, when necessary, combined range of offerings from a single source.”
The news is a stunning move for a company that has been a crucial player in the power sector since its inception 150 years ago. The decision about the spinoff and public listing still need to be cemented, likely at a special shareholder’s meeting in June 2020.
While Siemens will give up its majority stake in Gas and Power, it also said it would remain a “strong anchor shareholder in the new company, with a stake that is to be initially somewhat less than 50% and, for the foreseeable future, above the level of a blocking minority holding,” it said.
Siemens also plans to support the new company through its professional financial services and its regional sales networks, as well as through “the licensing of the powerful Siemens brand.”
The spinoff will put Siemens’ Digital Industries (DI) and Smart Infrastructure (SI) divisions as its core. “This core will be supplemented by company-wide technology and service units and the company’s strategic majority stake in Siemens Healthineers. Siemens Mobility is also to be further strengthened as a growth business,” the company said.
According to Kaeser, Siemens is convinced that the strategic spinoff decision “will be positive for all participants and enable long-term value creation for customers, employees and shareholders.” The company also plans to “jointly pursue” recent market successes, such as its significant $15 billion deal in Iraq.
Siemens and other manufacturers of large gas turbines including General Electric Co. and Mitsubishi Heavy Industries Ltd. are grappling with a rapidly changing power market.
Renewable energy is growing quickly and interest in large gas turbines is waning globally. Large turbines can produce more than 250 megawatts of power by burning natural gas.
Speaking to Utilities Middle East last year, Scott Strazik, President & CEO, Power Services Business, GE Power, downplayed sentiments surrounding the uncertain future of GE’s gas turbine business, instead looking at the brighter and more optimistic side of things, fortified by the company’s capability built over 125 years of its existence.
“It is true that the gas turbine market is having a cyclical downturn right now as regards to new demand relative to where we were. But at the same time, for me in leading the services business I see a fleet that is very stable and that is running at a very stable basis in which our customers need us,” said Strazik.
Also last year, Siemens’s Kaeser said that the energy giant hoped to offset part of the industry slump by building smaller power plants. He expected demand for its smaller and more nimble gas turbines to increase “as utilities construct more power plants able to quickly respond to changes in power demand.”