Siemens, Gamesa near wind-power deal

Siemens AG and Gamesa Corporacion Tecnologica SA are close to announcing an anticipated deal to combine their wind-power activities and create the world’s largest wind turbine maker, according to sources familiar with the matter.

A deal, which could be announced as early as this week according to the people, would end months of uncertainty around the transaction. However, a deal announcement could be delayed, the sources said.

Siemens and Gamesa in February agreed in principle to combine their wind activities, but the tie-up hit a snag because Gamesa needed to renegotiate elements of an offshore wind joint venture, dubbed Adwen, with French nuclear engineering firm Areva SA. Those issues have been resolved in principle, the people said.

Siemens and Gamesa would likely seek a potential buyer for Adwen as part of that agreement, these sources said, adding that Adwen would be integrated into the combined wind activities of Siemens and Gamesa if no buyer is found.

Areva on Wednesday separately announced plans to split the state controlled nuclear-engineering group in three as part of a restructuring plan to raise as much as EUR8 billion ($8.97 billion).

The Siemens-Gamesa deal structure, to be revealed as early as Wednesday, foresees Siemens transferring its offshore wind activities to the Spanish company in exchange for a roughly 60% stake in a future enlarged business, sources familiar with the matter said. These sources said the potential combined entity could attain annual savings of around EUR200 million.

The expanded entity would likely have a market capitalization of roughly EUR10 billion, remain listed on the Madrid Stock Exchange and be led by Gamesa Chairman Ignacio Martin, the sources said.

Any transaction would need to be approved by Gamesa shareholders.

“Negotiations between Gamesa and Siemens are still open. We haven’t made any decision nor materialized any agreement so far,” Gamesa said in a statement Wednesday.

Siemens declined to comment.

The deal would create a new global market leader by capacity, ahead of China’s Xinjiang Goldwind Science & Technology Co., Denmark’s Vestas A/S and General Electric Co., according to FTI Consulting.

Siemens’ wind division, which took in revenues near EUR6 billion in 2015, manufactures and installs wind turbines for on- and offshore farms. But the business is largely focused on the offshore market–where it has an ample order backlog for turbines–while missing onshore growth opportunities.

“Siemens offshore [wind business] is a world market leader, but offshore alone is not enough to become profitable,” said Christoph Niesel, a portfolio manager at Union Investment, a Siemens’ investor. Mr. Niesel said the deal with Gamesa will allow Siemens to fill this hole in the business.

Profitability at the wind division has lagged over the past years and was held back in the last fiscal year in part because of tougher offshore competition that translated into lower margins, Siemens has said.

At the same time, the wind unit has suffered because of reshuffles and mismanagement, according to analysts. Shoring up the business would boost income in a growth area and help Siemens fend off increasing competition, analysts say.

Siemens Chief Executive Joe Kaeser appears to agree. “The future belongs to renewable energies. That’s why we will be making further investments in our wind business,” Mr. Kaeser said at Siemens’ shareholders meeting in late January, just days before Gamesa revealed it was in talks with Siemens on a tie-up.

The deal would be a shift in direction for Mr. Kaeser. Since taking the top spot at Siemens in 2013, he has invested heavily in the oil and gas unit, acquiring the energy operations of the U.K.’s Rolls-Royce Holdings and U.S.-based oil equipment maker Dresser-Rand Group Inc.

The Dresser acquisition, valued at $7.6 billion, came just as global oil prices started to plunge last year, calling into question Mr. Kaeser’s efforts to reshape the company around conventional energy operations.

“Fossil power is starting to die. Therefore, you need to diversify,” Mr. Niesel said of Siemens’ efforts to strengthen the wind business. He added that what is “sexy with wind” right now is its profit potential through maintenance. “We are at the head of a cycle where you need more servicing of the installed base,” he said.

The deal with Gamesa would let Siemens expand its global wind footprint just as competition in the industry is escalating. Siemens’s primary global rival, General Electric Co., in 2014 beat Siemens in a bidding war for the energy operations of France’s Alstom, which included its onshore wind business and a joint venture for offshore wind. That deal made GE a player in the European wind market, increasing its market presence by 50%, GE has said. Before the transaction, GE Wind was primarily active in the U.S., Canada and Brazil.

Gamesa’s wind turbine business would give Siemens the top position in India, Brazil, Mexico and Egypt for turbines, according to FTI. In June, Siemens signed a EUR8 billion deal–the largest in its history–to provide Egypt with natural gas-fired power plants and wind power installations, including up to 600 wind turbines.

Gamesa is also the number one foreign turbine maker in China, which accounted for nearly half of new installations world-wide last year, or 30,500 megawatt, data from the Global Wind Energy Council show. China holds around one third of cumulative world wind capacity, followed by the U.S. with 17% and Germany with over 10%.

Siemens’s tie-up with Gamesa is the latest step in the global wind turbine industry’s process of consolidation. In October, German turbine maker Nordex SE said it would purchase the wind operations of Spain’s Acciona SA for cash and shares amounting to EUR785 million. The unit has turbine plants in Spain, the U.S. and Brazil.

The industry has been preparing for “slower growth and more intense competition with a focus to reduce costs of turbines, to reduce the cost of energy for wind and to position for growth in emerging markets,” according to analysts at J.P. Morgan.