Bottom line: Midea’s investment in Kuka is likely to move ahead and could be successful, but will be far more costly than a Chinese joint venture between the 2 sides that would have achieved most of Midea’s objectives.
After showing growing signs of collapse, a deal that would see Chinese appliance giant Midea (Shenzhen: 000333) buy a large stake in German industrial robotics firm Kuka (Frankfurt: KU2) is suddenly springing back to life, with word the deal has received the official nod from Berlin. But Berlin is only giving its approval with a number of major conditions, including reassurances that Midea won’t try to buy a majority of Kuka and also that Kuka’s German-based jobs will be protected. Such a compromise looks promising and could ultimately help to seal the deal. But it also raises the question of why exactly Midea needs to make this particular form of investment.
This deal became controversial almost as soon as it was announced last month, when Midea said it had purchased a stake in Kuka and hoped to raise that to up to 30 percent. That would have marked the biggest investment in a European leading-edge technology firm by a Chinese company, and almost immediately prompted EU and German politicians to raise concerns. (previous post)
Now it appears that negotiators have been working overtime to craft a deal that would be acceptable to all sides, with media reporting on a sudden string of new developments that have culminated with Berlin’s approval of the deal. (Chinese article) A key development is Midea’s pledge that it won’t attempt to buy more than 49 percent of Kuka, even though it’s likely to become the German company’s single largest stakeholder after completion of a deal. (English article)
Under the current arrangement, Midea is aiming to buy 30 percent of Kuka’s shares. Under German law, that threshold would force Midea to make a tender offer for all of the company’s remaining shares. That means Midea could end up with a much bigger stake depending on how many shareholders accepted the offer, an outcome that apparently wasn’t attractive to Berlin.
So Midea is now saying that even if shareholders tender stock that would push its stake above 50 percent, it will take steps to make sure its actual stake remains below the 50 percent level. What’s more, Midea is also pledging not to get involved in Kuka’s management, and allow the company to remain independent. That leads to the most important piece of the puzzle, which has Midea pledging not to cut any German jobs if the deal is ultimately completed. (English article)
Saving German Jobs
The backstory here is that Germany didn’t want to see one of its leading-edge technology companies purchased by the Chinese, who might then pillage all of its technology and set up parallel, lower-cost factories in China. Thus all of these reassurances are designed to allay those fears, and indeed it looks like Kuka will remain largely intact as a German company with a very big Chinese stakeholder.
Midea has 2 major reasons for pursuing this particular deal. One is that it needs to upgrade its own production lines, as part of a broader automation drive by Chinese manufacturers to offset rapidly rising labor costs at home. The second reason is profit-oriented, since Kuka would like to use Midea’s connections to expand in China, to take advantage of other manufacturers making similar upgrades to their production lines.
That brings me back to my earlier question of whether this is the best form of investment for Midea to achieve its goals, since such an investment is likely to cost more than $2 billion. Instead, I would argue a China joint venture might make much more sense for this pair, since such a tie-up would be far less costly. It would also allow Midea to achieve all of its goals and have more control over the partnership. Perhaps we’ll see such a joint venture announced later, but the partnership is coming at a very high cost to Midea.
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