Siemens Energy Spin-off: Opportunity For The International Investor

Overview

Siemens AG, the giant conglomerate with headquarters in Germany, is spinning off 55% of their energy business later this month. Each Siemens shareholder will receive one share of Siemens Energy for each two shares they own on September 25th. The company intends to sell most of the remaining 45% in the open market 12-18 months from now.

Spin-offs sometimes provide great investment opportunities. Many shareholders, when faced with two stocks after purchasing just one, decide they want one and dump the other. If many decide to dump the same stock the sudden selling can drive the price down to unreasonably low prices. Other times a lackluster parent company is able to shed an unprofitable business unit and start producing financial reports that allow the market to realize their full value.

The Siemens Energy spin-off appears to have both of these dynamics at play. I recommend purchasing the Siemens stock now, before the spin-off, or wait for Siemens Energy to sell at a great price on the Frankfurt Exchange immediately after it starts trading.

Buy Siemens Now

Siemens Energy has been a business unit that requires high capital and provided low returns. Spinning it off should alter the Siemens AG financial reports to show higher profitability and a better return on investment. Both should lead to a higher valuation for the remaining company. I don't think it is a coincidence that Siemens' fiscal year ends on September 30th - two days after the spin-off. Their 2020 annual report will be issued just a few weeks later without the high-investment/low-return energy unit included.

Buy Siemens Energy On The Dip

Siemens Energy will likely be a bargain when it starts trading and it contains a hidden gem asset.

Most likely Siemens Energy will sell at a deep discount initially as most Siemens shareholders decided to sell Energy and keep the Siemens parent. The selling will likely be intensified by Deutsche Bank who will be obligated to sell the Siemens Energy shares for the American shareholders.

Siemens trades on the Frankfurt Exchange under the symbol SIE. Under an arrangement with Deutsche Bank it also trades as an American Depository Receipt (ADR) on the New York Stock Exchange under the symbol SIEGY. Siemens has decided to not provide an ADR for Siemens Energy. This means that Siemens Energy shares will not be provided to the American stockholders. Instead, Deutsche Bank will immediately sell the Siemens Energy shares and provide the resulting cash as a cash dividend. The sudden selling of so many Siemens Energy shares will surely drive the price down. From page 65 of the Siemens Energy prospectus:

New Shares attributable to the shares of Siemens AG which are traded in the form of American Depositary Receipts (ADR) in the U.S. will be sold by a representative of the depositary once the Spin-Off becomes effective and the proceeds (net of costs) will be paid to the ADR holders. Therefore, it is not unlikely that considerable selling pressure will develop immediately after the Shares are admitted to trading.

Deutsche Bank doesn't disclose how many ADR shares they hold so it isn't possible to quantify the scale of the ADR-induced selling. (A Deutsche Bank representative told me they "are not required to disclose that information.")

Note, that you will have to be able to buy the shares on the Frankfurt Exchange to take advantage of this likely opportunity.

Finally, there is a gem buried in Siemens Energy: it is taking Siemens' two-thirds stake in Siemens Gamesa Renewable Energy. Gamesa is the largest seller of wind turbines in the world. Its shares trade on the Madrid Exchange under the symbol SGRE. With a current price of €20.02, the Siemens Energy stake has a market value of €9.07 billion.

Siemens Energy will have 726.7 million shares outstanding. The Gamesa stake is worth €12.49/share. I suggest buying in Frankfurt when the price is below €7. If you want to get fancy, you can short the Gamesa shares in Madrid and wait for the spread to narrow.

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