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As wind sector consolidates, analysts see value in Siemens Gamesa's Senvion deal

SNL Image

A blade factory operated by Siemens Gamesa rival Vestas in Colorado.
Source: AP Photo

Wind turbine supplier Siemens Gamesa Renewable Energy SA's deal to buy a portfolio of European assets from struggling rival Senvion SA offers good value and will boost both sales and business resilience at a time of sluggish growth for the Spanish company, according to several analysts.

The deal may also offer a blueprint for how the largest developers and suppliers can stay afloat in the rapidly consolidating wind sector.

Germany-based Senvion became one of the biggest casualties of the increasingly competitive wind industry when it filed for insolvency in April. This week, it struck a €200 million deal with Siemens Gamesa for part of its business, covering an 8.9-GW service fleet, an onshore blade manufacturing plant in Portugal and all intellectual property owned by the company.

"At a consideration of around €200 million of cash this looks to be quite cheap," Deutsche Bank analysts Vivek Midha and Gael de-Bray wrote in a note on Oct. 21. "With [Siemens Gamesa's] consensus end-FY19 net debt forecast at around €650 million, this would still leave it with a comfortable net cash position."

Supriya Subramanian, an analyst at UBS, also said the deal could "potentially be value-accretive," since the service assets alone could be worth €350 million, assuming Siemens Gamesa is able to derive margins similar to the roughly 20% that it realizes in its current services business.

In addition to the purchase price, Siemens Gamesa estimates that integrating and restructuring the Senvion assets will cost around €150 million.

Consolidating market

Turbine manufacturers have faced headwinds from a shift to competitive auctions for renewables around the world, which has driven steep cost reductions and squeezed supply chains. Although project margins are expected to recover soon, trade tariffs have also weighed on the sector this year, leading Siemens Gamesa to lower its profitability guidance in July.

Before Siemens Gamesa struck its deal with Senvion, Spain's Acciona SA, a major wind farm developer, announced a potential takeover offer for German turbine maker Nordex SE, in which it had already owned a minority stake.

Competitive pressure is driving consolidation in other parts of the industry as well, with developers Engie SA and EDP Renováveis SA joining forces on offshore wind projects, for example.

"We're seeing that the market is consolidating," Gunnar Groebler, senior vice president in charge of the wind business at Swedish utility Vattenfall AB, said in an interview this month. "You see that on the supplier side, [just] look at Senvion — that is part of consolidation. You see that also on the development and operator side."

Senvion's troubles stemmed at least in part from cost overruns and project delays that held up revenue, but other suppliers have also felt the heat. Last month, both Siemens Gamesa and its main European rival, Denmark's Vestas Wind Systems A/S, announced job cuts as part of efforts to streamline their businesses.

"These difficult measures are necessary as a responsible resolution to an increasingly competitive industry landscape," Andreas Nauen, managing director for Siemens Gamesa's Danish business, said.

Good value

The Deutsche Bank analysts said the Senvion deal implied good value at a likely enterprise value to EBIT multiple of under 10x, "where we would have even been comfortable with a multiple going up to around 15x."

Although Siemens Gamesa has not yet detailed the additional revenues it expects from the deal, Midha and de-Bray noted that Senvion's external services revenue in 2017 was €308 million and likely to have come mainly from the European business.

By comparison, Siemens Gamesa expects total revenues between €10 billion and €11 billion this year, up from €9.12 billion in 2018. During the second quarter of 2019, its service business saw €750 million in firm orders, up 11% year over year.

Through the deal, Siemens Gamesa will grow its total capacity under maintenance to almost 69 GW after increasing its installed fleet by 6% from the end of fiscal 2017 to the third quarter of this year, Midha and de-Bray said.

"Siemens Gamesa's installed fleet has grown at a sluggish pace," they wrote. "Adding more onto this would be a positive for the shares, improving the overall mix."

In addition, Midha and de-Bray said the Portuguese plant, which Siemens Gamesa claimed is one of the most competitive in Europe, will reduce the company's dependence on sourcing blades from Asia and help it compete more effectively on cost in Europe.