Osram Bidding War Triggers Flashing Red Lights

Bidding against yourself is seldom a good look. AMS’s increase in its offer for German lighting group Osram to 4 billion euros has probably seen off a speculative tilt from buyout group Bain Capital. But the Austrian sensor specialist’s shareholders will have to stump up more cash, and its bet on self-driving cars just got riskier. The dashboard warning light is flashing red.

The combination sounds neat: AMS’s products detect light, and Osram’s bulbs emit it. Putting them together would, among other uses, increase the chances of meeting autonomous vehicles’ need for a fail-safe all-seeing technology. A deal would also help AMS, which makes face-recognition gadgets for phones, escape the shadow of Apple, which accounts for 40% of its revenue.

The big quibble is price. Its original 38.50 euros per share offer, underpinned by a 4.2 billion-euro bridging loan from HSBC and UBS, was already causing concerns. Pushing that up to 41 euros on Friday to see off a possible counterbid by Bain and Advent will exacerbate the unease. To pay for the increase, AMS will be asking shareholders for 100 million euros on top of a 1.5 billion-euro equity raise already announced. But even after that extra equity, the enlarged group’s net debt will rise from 4.3 times 2019 EBITDA to a chunky 4.5 times. That helps explain why AMS shares fell by around 3% on Friday.

The Zurich-listed group thinks it can slash that post-merger debt to 2 times forecast EBITDA within two years. To get there, however, it is relying on 60 million euros of revenue synergies, in addition to 240 million euros of cost ones. There are also questions over its hoped-for double-digit top-line growth given the travails of the European car sector and Osram’s dismal third quarter, in which revenue dropped 9%.

Osram’s shareholders, who had been facing a tricky choice over whether to trust Bain and Advent’s promise of a “meaningful” premium, can now sit back and enjoy the windfall. Its 26,000 staff, who will bear the brunt of cost savings that are now even more crucial to the deal’s success, may take a dimmer view.