Lenovo targets European growth with Medion acquisition

Lenovo is back on the acquisition trail after agreeing to buy German computer company Medion. It is the Chinese company’s biggest acquisition since its landmark takeover of IBM in 2004 — a deal that launched a thousand seminars on the “China outbound” phenomenon.

This deal is smaller and more strategic. Lenovo has agreed to buy 37% of Medion’s outstanding shares from Gerd Brachmann, the company’s founder and chief executive, at €13 ($18.60) a share. Brachmann currently owns 60% of the company. Lenovo has also made an offer to buy anywhere from 15% to the full 40% of shares owned by the public, at the same price. This puts a price tag on the deal of anywhere from $459 million to $666 million and implies a total value for Medion of $831 million.

Medion is based in Essen and focuses on PCs and consumer electronics, as well as digital services, mobile internet and mobile telecommunications. It is Germany's third-biggest computer company by sales. The takeover offer is subject to antitrust clearance from the European Commission as well as the achievement of a minimum participation threshold of 51% of Medion’s registered share capital (Brachmann’s stake plus the minimum 15% public offer).

Medion said that Lenovo will pay 80% of the purchase price in cash and 20% in Lenovo shares. Lenovo has agreed a long-term call and put option with respect to the remaining Medion shares held by Brachmann.

Medion’s sales rose by 13.2% to €1.16 billion in the project business and by 24% to €478 million in its direct business in 2010, and in February this year the company said it expected sales to be unchanged for 2011 due to a price decline, in particular for LCD TVs, and a trend towards compact mobile consumer electronics products with lower price points. It expected earnings to rise by about 15%. On that basis, Medion’s price-to-earnings multiple is around 18 times, though some analysts are forecasting higher multiples into the low-20s.

In a media teleconference yesterday, Wai Ming Wong, Lenovo’s chief financial officer, said the deal would create a platform for strong growth in the western European consumer market through Medion’s extensive distribution network and its proven management ability in a mature and competitive market.

Wong described the deal as a “win-win” for both companies, saying that Lenovo’s huge manufacturing operation is a perfect complement to Medion’s front-end, allowing it to lower costs and compete even more aggressively. Three-quarters of Medion’s sales are derived from Germany, with most of the rest coming from across western Europe.

But Lenovo is buying more than just a few shops. Medion is a well-managed company that has remained profitable even through the financial crisis, despite its small size — its overall sales volume is around 1.2 million units, compared to Lenovo’s 20 million units.

That gives Lenovo a good opportunity to continue its strong growth. Wong claimed that Lenovo has been the world’s fastest-growing computer company for the past six quarters and that this deal would allow it maintain that momentum.

As such, Medion is worth much more to Lenovo than the sum of its parts. Valuing the company on a PE basis, said Wong, did not really capture the scale of the opportunity. “We look at the underlying growth in earnings and the cost synergies we are able to generate, as well as the obvious management capability. PE is just one valuation. One should not just look at price divided by earnings per share. You have to look at the quality of the business.”

Wong said the transaction would have a positive effect on Lenovo’s earnings per share, even before extracting the synergies from Lenovo’s economies of scale.

The Medion deal comes shortly after Lenovo’s agreement to combine PC businesses with Japan’s NEC Corporation in a joint venture. Lenovo paid around $500 million for what is currently Japan’s largest PC business, catapulting it to the number one position in Japan’s PC market from seventh.

Barclays Capital acted as the sole financial adviser to Lenovo on the Medion purchase.