This updated version of the post published on November 7 includes additional comments about the sale of Siemens from an informed source whom I interviewed this week. My informant asked not to be named because he was not authorized by his company to speak for publication.
David H. Kirkwood, Editor, Hearing News Watch
MUNICH, GERMANY—In the largest transaction in the history of the hearing aid industry, the German industrial giant Siemens AG has agreed to sell Siemens Audiology Solutions for 2.15 billion Euros (about $2.67 billion), plus an earn-out component.
The winning bid for the world’s oldest and one of its largest hearing aid manufacturers came from EQT VI, a Swedish investment company, together with Santo Holding, a co-investor owned by the Strüngmanns, a German family.
The sale, announced by Siemens and EQT on November 6, is expected to take place in the first quarter of 2015. When it does, it will mark the culmination of a five-year process (see below) leading to Siemens’ divestment of its hearing aid division.
SIEMENS WILL REMAIN INVOLVED
The transaction will not bring an end to Siemens hearing aids or to Siemens AG’s involvement in audiology. The parent company, one of the world’s 60 largest, will maintain a share of the hearing aid business, with preferred equity of 200 million Euros (nearly $250 million), and it will have a seat on the board of the buyer group. Moreover, Siemens stated that the buyers “will be allowed to continue using the Siemens product brand for the hearing aid business over the medium term.”
Roger Radke, CEO of Siemens Audiology Solutions, said that the company’s management is “looking forward to taking our business to its full potential through continued investments and by leveraging EQT’s strong network of industrial advisors with specific hearing aids and broader healthcare expertise.”
Hermann Requardt, CEO of Siemens Healthcare, said, “We are pleased to take a partner on board with a track record of creating value by applying a long-term industrial approach with focus on growing the top-line.” He added, “Siemens has decided to re-invest a part of the proceeds to continue as a shareholder benefiting from the development and a much stronger IPO candidate in the future.”
101 YEARS OF HEARING AIDS
Siemens introduced its first hearing aid in 1913, and for much of the next century was the industry leader. While Sonova (parent company of Phonak), William Demant (which owns Oticon), and, possibly, GN Store Nord (ReSound’s parent company) have surpassed it in sales, Siemens Audiology Solutions remains one of the “Big Six” manufacturers that dominate the business.
In fiscal 2014, Siemens Audiology reported revenue of 693 million Euros (about $862 million) and earnings before interest, taxes, depreciation and amortization (EBITDA) of 145 million Euros ($180 million). In the past 12 months, it has sold more than 3 million hearing aids. It has over 5000 employees, including many at its U.S. division based in Piscataway, NJ.
STRATEGY IS TO GO PUBLIC
In its statement on purchasing Siemens, EQT said that it plans to position Siemens to become a publicly traded company. To do this, its strategy will be “to support management in further accelerating current sales growth by continued investments in product development and sales force excellence [and] utilizing the competence of EQT’s Industrial Network and experience from other healthcare sector investments.”
Marcus Brennecke, a partner at EQT, said that Siemens Audiology Solutions “has a strong heritage of innovative, high-quality products and we have been particularly impressed with their strong track record over the last couple of years… We believe Siemens Audiology Solutions provides the ideal platform for an entry into this attractive industry.”
In a November 10 interview with this blog, an executive who attended EQT’s presentation last week to Siemens employees in Germany underscored the significance of the future ownership’s intention to have an IPO (initial public offering). He told Hearing News Watch that by all indications the future owners are looking to build the long-term value of the company, not simply to cut costs and improve the short-term bottom line in order to resell it for a quick profit.
He added that EQT and its partner, Santo Holding, are focusing on growing the business, and are prepared to invest in the company to achieve that.
EQT, the largest private equity group in Northern Europe, is a growth-oriented investment company managing around 22 billion Euros in assets and with expertise in the healthcare and medical engineering sector. Among its properties is LBX, one of China’s largest pharmacy chains.
EQT was founded in 1994, in part by Investor AB, which is owned by the Wallenberg Family. The Wallenbergs are a major Swedish financial dynasty whose members include Raoul Wallenberg, who saved the lives of tens of thousands of Jews during World War II.
Santo also has a strong track record of successful investment. It is run by Thomas and Andreas Strüngmann, twin brothers, who in 1986 founded Hexal AG, a maker of generic drugs. After turning it into the second largest pharmaceutical company in Germany, they sold Hexal to Novartis in 2005 for $7.5 billion (about 6 billion Euros).
WILL CHAPERO RETURN?
I asked my informant if there was any truth to recent rumors that Valentin Chapero would play a role in the future management of Siemens Audiology. Chapero was formerly CEO of Siemens Audiology, then left to become CEO of Sonova. Under his leadership, Sonova grew rapidly and became the largest hearing aid manufacturer in the world. Chapero resigned from Sonova in 2011, along with Oliver Walker, its chief financial officer, and Andy Rihs, the chairman, amid allegations of insider trading. However, Swiss authorities never brought charges against him and he has remained prominent in the industry.
My source said he could not confirm such reports, adding that whenever there is discussion of new ownership or management of a hearing aid company, Chapero’s name invariably comes up.
A WATERSHED EVENT
Although mergers and acquisitions in the hearing aid industry have been commonplace for decades, the sale of Siemens Audiology was unprecedented. For one thing, it is by far the largest price ever paid for a hearing aid company. In addition, if the deal goes through, as both parties expect, it will be the first time that one of the “Big Six” hearing aid companies (Sonova, William Demant, GN Store Nord, Siemens, Starkey, and Widex) has changed hands.
The only comparable transaction fell through because of anti-trust considerations. In 2006, Sonova agreed to buy ReSound from GN for about $2.65 billion. However, when the German Federal Cartel Office ruled in 2007 that the purchase would create an “oligopoly” in which a few companies dominated the German hearing aid market, it killed the deal.
Another unusual aspect of the Siemens sale is that the purchasers, EQT and Santo Holding, are not already in the hearing aid business. Not since 1997 when Beltone was sold to a private investment company (which sold it three years later to GN), has an outside company bought a major hearing aid manufacturer.
In 2010, a German court nullified the ruling that had derailed Sonova’s attempt to buy ReSound. The decision came too late to save that deal, but it did open up the possibility of one of the “Big Six” purchasing Siemens.
Indeed, after Siemens announced last May that it planned to sell its audiology business, GN Store Nord entered the bidding for a while. However, it was not willing to match the winning bidders and dropped out. Also at that time, Siemens envisioned taking its hearing aid business public itself. In the end, however, it accepted the EQT-Santo offer, saying, “Due to the very attractive offer made by the two investors, Siemens has decided not to further pursue preparations for the public listing.”
END OF A LONG ROAD
It was not until this year that Siemens publicly acknowledged that Siemens Audiology was no longer a comfortable fit with the company as a whole. However, since 2009 there had been a series of credible reports that the company was shopping its hearing aid business.
According to the executive who spoke to me on condition of anonymity, there had been considerable interest in Siemens from prospective buyers. In summer 2010, one company offered 1.4 billion Euros. However, instead of accepting a lower bid than it wanted, Siemens decided to invest heavily in research and development to increase the future sale value of its audiology division. The strategy paid off, as the bid by EQT and Santo was more than 50% greater than the one it turned down four years earlier.
Looking ahead at the future of the 101-year-old hearing aid manufacturer, Siemens AG said, “The transaction will provide the audiology business with additional entrepreneurial freedom and flexibility while enabling it to continue its successful growth track of the last few years – with positive prospects for customers and employees.”