Gamesa Blows Siemens a Valentine

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by Debra Fiakas CFA

Spain’s wind turbine manufacturer, GAMESA Corporation (GTQ1: Berlin; GAM: Madrid; GCTAF: OTC/PK), has been under pressure lately to spread profits over a hefty debt load.  The November post entitled The Wind in Spain is Mostly in GAMESA, noted the expanding product line and building customer base.  Backlog at the end of September 2015 was 3,034 megawatts, representing a 43% increases over backlog a year ago.

Robust sales and higher profit margins have generated strong cash flows and GAMESA has been able to pay down debt.  During the first nine months of 2015 the company used Euros 238 in cash to reduce net debt to Euros 70 by the end of September 2015.  Still the debt burden had been an issue for GAMESA as principal payments on notes and bond are coming due.  However, in December 2015, GAMESA announced an extension of the expiration date to January 2021, for its Euro 750 million syndicated loan facility.

Thus last week, with the pressure off on the debt front, it was a bit of a surprise to see news that GAMESA has been discussing a possible merger with Siemens AG (SIEGY:  OTC/PK, SIE: DE).  Siemens has extensive interests in the renewable energy sector as well as electricity generation infrastructure.  Folding GAMESA’s wind power business into Siemens would create the largest wind turbine company in the world, surpassing Vestas Wind Systems (VWS: Copenhagen or VWDRY: OTC/PK), which is now in the number one spot with about 12% market share, and General Electric (GE), which now appears to be neck and neck with Siemen’s for the number two position, each with about 9% to 10% market share.  A clear market leadership position might give Siemen’s a competitive boost.

Siemens would have much to gain in the deal.  The German giant would get GAMESA’s diverse product line of wind turbines as well as access to GAMESA’s installed base of wind power generation projects.  The November 13th post noted GAMESA’s recent introduction of a new 2.5 megawatt turbine for low winds earlier in the year.  The first turbine in a 3.3 megawatt family was launched at the European Wind Energy Association event in Paris in late November.  The turbine like most of GAMESA’s product line is intended for locations on-shore.  This might be a favorable complement to Siemen’s roster of wind turbines that are mostly used at off-shore sites.

GAMESA’s installed base of wind turbines might be the more interesting to Siemens, which does a fair amount of business through service contracts with energy infrastructure owners.  Siemens, with its strong reputation for quality and reliability of service, might fare will in winning GAMESA customers to long-term maintenance contracts that would drive a tidy flow of recurring revenue and profits.

Of course, GAMESA has much to gain as well.  As a part of a much larger company, GAMESA would have easier access to lower cost capital.  Additionally, Siemen’s has so very many good friends in the energy industry.  In the wind turbine market, GAMESA competes within a large pack none of which have more than 5% of market share.  The GAMESA-Siemen’s tie-up could make an imposing presentation with a broad product line, unparalleled service capability and deep bench of wind power generation expertise   –  a compelling circumstance for GAMESA sales reps.     

The validity of the Siemen-GAMESA merger discussion is likely to be proven out in the next couple of weeks.  GAMESA shares have already reflected new interest in the stock.

Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein. AMRS is included in Crystal Equity Research’s Beach Boys Index of companies developing alternative energy using the power of the sun.


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