Bain Capital Has a $4.9 Billion Light Bulb Moment

(Bloomberg Opinion) -- Private equity firms are sniffing around the walking wounded of German stock market — a fertile hunting ground, given it has been a production line of profit warnings this year.

The latest target looks to be Osram Licht AG, a lighting manufacturer that relies heavily on the automotive industry. Bain Capital is exploring a possible bid, Bloomberg News reported on Tuesday. It's a logical target: The shares had been close to a four-year low, the Munich-based company has negligible debt, and there will always be demand for light.

Yet there's a snag preventing Osram being a perfect leveraged buyout candidate. Could a deal really get financed?

Osram's turnaround under CEO Olaf Berlien remains a work in progress. A new factory in Malaysia has been a drain on capital expenditure, something which prompted a row with former shareholder Siemens AG. Wisely, the industrial group sold its stake in 2017 at nearly twice the current share price. The lighting company says of its outlook that “visibility will remain limited for the foreseeable future.” 

A takeover at a 30 percent premium to Monday's closing price would cost 4.3 billion euros ($4.9 billion) after deducting Osram's small amount of net cash. That's 7.3 times the target's mean forecast Ebitda for 2019. But Osram has a conservative balance sheet for a reason. It operates in a cyclical industry, so borrowings can't be too aggressive. That creates an immediate problem for private equity bidders given they rely on leverage to generate returns of at least 15 percent. A buyer could write a bigger equity check, or use some more expensive debt financing — but that would usually eat into returns.

Could an equity-heavy deal work? The expected trajectory of Osram's financial performance suggests it might, on paper. As things stand, analysts expect Ebitda to increase rapidly in coming years. Their average estimate for 2021 is 764 million euros, 33 percent more than in 2019, with the highest forecast coming in at some 952 million euros. Apply the same valuation multiple as on the way in, and Osram would then be worth at least 5.6 billion euros. That's annualized growth of about 15 percent. Use debt to finance a quarter of the deal, and the equity returns would be about 20 percent in this short time-frame. Unfortunately, this crude illustration assumes that analysts are done with downgrading their forecasts — a big if.

It would still be a big check for a private equity firm to write for a single deal. 

If Osram believes it can recover quickly, it may not be too receptive to selling at a time when the prevailing sentiment in the stock market is so unfavorable. After so much bad news from the company, it's no wonder investors have gobbled up the hope of a bid, pushing the shares up as much as 20 percent on Tuesday. But getting a deal agreed, financed and completed looks ambitious.

To contact the editor responsible for this story: Edward Evans at eevans3@bloomberg.net

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Chris Hughes is a Bloomberg Opinion columnist covering deals. He previously worked for Reuters Breakingviews, as well as the Financial Times and the Independent newspaper.

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