June 02, 2016 | Industrials | Europe | Ended

Kuka / Midea: German Protectionism and CFIUS Scrutiny

Midea’s strategic rationale for acquiring Kuka is questionable. As a household appliance manufacturer, Midea has little experience in robots, let alone in many of the other seven industry sectors in which Kuka operates. Arguably, it makes even less sense for Midea to pursue an unsolicited takeover proposal for Kuka with a 59.6% share premium, at 17x EBITDA, for what may only be a minority stake in Kuka. If Kuka’s Management and Supervisory Boards (collectively, “Board”) do not recommend the offer, the transaction will likely fail to attain US regulatory approvals. If the transaction is recommended, Kuka shareholders may argue against any actions by management to unnecessarily divest assets or contracts to appease regulators - for the sole benefit of a non controlling shareholder - and Kuka itself risks ending up in a shareholder stalemate situation (as was the case in late 2011 with SGL Carbon (SGL GY)), given the company’s shareholder structure and Voith’s (private) 25.1% blocking stake. Increasing its stake to above 30% will likely give Midea a seat on Kuka’s Supervisory Board but, if it holds less than 50%, Midea will not be allowed to make any strategic decisions for the German company. Midea’s business profile suggests that synergies between the two companies are limited and there is little need for Midea to increase its stake. Instead, similar and much cheaper collaboration could be achieved by signing new joint ventures and partnership agreements. Regulators in the US will heavily scrutinise the deal as it presents perceived threats to US national security. Most notably, CFIUS will likely have issues with a Chinese company having an influence on Kuka’s contracts with Northrup Grumman (NOC US) to manufacture and maintain fighter jets for the US Air Force. Although Kuka’s ...

Contents 1. Kuka and the Industrial Robotics Market 2. Midea’s Questionable Strategic Rationale for the Acquisition 3. CFIUS Scrutiny and a Potentially Critical Review 4. EU Scrutiny and German Protectionism Feasibility 5. Strategies Behind Keeping Kuka Listed and the 30% Condition 6. Voith and Loh: Stalemate or Counterbid? 7. Financial Valuation Analysis 8. Precedent CFIUS Reviews and Relevant Deals 9. Deal Structure and Timing Expectations 10. Break Price, Implied Probabilities and the Risk Arbitrage Spread (32 pages)

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