China faces surging labour costs and an ageing population – one answer is to bring in the machines.
China's biggest home-appliance maker said on Wednesday that it intended to launch a takeover bid for Germany's Kuka at €115 per share in cash. The proposed offer by Shenzhen-listed Midea, which already owns a 13.5% stake in Kuka, values the German robotics firm at about €4.6 billion ($5.2 billion).
Augsburg-headquartered Kuka, which counts car makers BMW and Audi among its clients, is already plugged into the fast-growing Chinese robotics market, having opened a plant in Shanghai in 2014. Its stated aim is to grow its sales in China to €1 billion by 2020 from €425 million in the last fiscal year, underlining the market's lucrative potential.
China has just 305 robots per 10,000 automotive workers compared with 1,141 in the US and 1,414 in Japan, according to research by investment bank Morgan Stanley. At the same time, the average annual salary of a manufacturing worker in China has more than tripled from Rmb17,966 a year in 2006 to Rmb55,324 in 2015, according to data provider Trading Economics. (Based on current and historical exchange rates, that's a jump from roughly $2,250 to $8,650).
In addition, there are an array of potential healthcare applications for China’s fast ageing population, including rehabilitation robots and mobility platforms.
Together, these two trends are driving a compound annual growth rate in robotics sales in China of 14%, according to Morgan Stanley.
Knock-out offer
Midea's offer represents a 59.6% premium over Kuka's unaffected closing price of €72.05 on February 3, the day before Midea said it had upped its stake holding to 10.2%. It subsequently raised its stake to 13.5%.
As in other jurisdictions, an offer for all of a company's shares is mandatory in Germany whenever an investor's shareholding rises above 30%.
The takeover offer values Kuka at a lofty valuation. Midea's offer values the firm at 17.9 times the consensus earnings forecast for 2016 Ebitda.
Hauck & Aufhäuser Privatbankiers said the enterprise value, fully diluted, implies 26 times its estimate of Ebit. Warburg Research said the offer valued Kuka at about 21 times its Ebit estimate and an estimated 2017 price-earnings ratio of about 35 times, substantially ahead of its Japanese rivals Yaskawa and Fanuc as well as other German Engineering midcaps. Warburg Research estimated Kuka's discounted cash flow-based fair value at €64.
"We expect Midea to reach the minimum acceptance rate of 30%, especially considering that the company already owns more 13.5% of the outstanding shares," Henning Breiter, an analyst at Hauck & Aufhäuser Privatbankiers, said.
Midea seems willing to pay such a high price because there are so few large and independent robotics makers it could potentially buy. ABB, Fanuc, and Yaskawa Electric have leading robotics divisions but are unlikely sellers, according to one industry source.
Comparable deals in the broader industry automation market include Schneider Electric's acquisition of the UK's Invensys for $5.2 billion in 2013.
Midea's offer is also designed to deter interlopers into the deal and persuade Kuka’s other large shareholders to sell.
Voith AG owns 25% in Kuka and Friedhelm Loh another 10% and it is unclear whether they would be willing to sell. Voith, especially, emphasised its long-term strategic interest in Kuka when purchasing its stake in 2014.
Some analysts were not sure the offer would be enough to entice the two largest shareholders to sell.
"The low acceptance rate and Midea's statements suggest in our view that Voith and Mr. Loh have not agreed beforehand to sell their stakes to Midea," said Stefan Augustin at Oddo Seydler.
The rare bid by a Chinese firm for a publicly listed company follows a courtship of several years by Midea, accelerated by meetings between their chief executives.
Founded in 1968 in Guangdong, Midea's goal is to raise its overall sales over the coming years to more than €25 billion, of which smart devices and service robotics will form a significant portion.
Know-how
Midea has been looking for technology know-how oversees. It said on March 30 that it would buy 80.1% of shares in Toshiba Lifestyle Products & Services from Toshiba for about ¥53.7 billion ($447 million).
Midea is not alone among Chinese electronic goods companies looking overseas. Witness Haier Group’s bid $5.4 billion for the home appliances division of General Electric in January.
Haier has an 8% share of the Chinese home appliance market, which includes refrigerators and washing machines, versus market leader Midea's 17% share, according to research company Euromonitor International.
Midea also wanted to acquire GE Appliances, which is the second-biggest home appliances manufacturer in the US after Whirlpool with a 10% market share, according to a person familiar with the matter.
Midea has already agreed a financing package with an unnamed bank for the Kuka bid. The deal will not affect Midea's credit ratings, as the company has sufficient internal financial resources to fund the acquisition, said ratings agency Fitch Ratings said.
At end-2015, Midea's cash and liquid assets totalled Rmb38.5 billion after deducting debts; sufficient to pay for maximum proceeds of not more than €4 billion (Rmb29.2 billion). Fitch expects Midea can generate over Rmb13 billion of free cash flow in 2016. As Midea's management stated they would like to keep Kuka as an independently listed company, the final acquisition proceeds are likely to be lower than Rmb29.2 billion.
Fitch expects Midea to continue generating positive free cash flow and to maintain a net-cash position after the acquisition. Fitch believes Midea will not invest further in Kuka after the acquisition, as Kuka can generate sufficient cash-flow for its own capex.
Morgan Stanley is acting as exclusive financial advisor and Freshfields Bruckhaus Deringer is acting as legal advisor to Midea on the transaction.
The completion of the takeover offer will be subject to achieving a minimum acceptance threshold of 30% and other regulatory clearances.
This article has been updated to add reaction from Fitch
