On May 19, Siemens investors were taken by surprise when the company announced the sale of its low-voltage and geared motors business to its parent company, Siemens AG. The stock tanked 12 percent since this announcement in the last hour of trade on May 19.

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The low-voltage and geared motors business is a part of the Digital Industries segment of Siemens and the deal is for a cash consideration of Rs 2,200 crore, to paid as a special dividend. This consideration was twice the FY22 revenue, representing 7 percent and 9 percent of Siemens consolidated revenue and earnings before, interest and tax.

Siemens, however, shall be taking minority approval for this transaction. But before providing an approval, Siemens minority shareholders seek answers to five crucial questions in regards to this deal.

First being, the cogitation for arriving at the given valuation. The company's management highlighted that independent valuation by a reputed firm further supported by a fairness opinion from a merchant banker has been used to arrive at the transaction value.

The analyst community thinks, prima facie, the deal seems unattractive for minority shareholders and hence their approval is unlikely.

Second, have the growth prospects for a high margin business - Digital Industries - turned weak? The low voltage motors FY22 margin at 12.5 percent is ahead of the 10 percent reported for the Digital Industries segment, in which it is housed. Going by the valuations for this deal, Digital Industries margins shall be be much lower than what the shareholders anticipate, which leads to a question if there is a possibility of downward revision in margins for next two years.

Third, how can a low dividend announcement compensate the offset loss of value? The entire sale proceeds of Rs 2,200 crore is being proposed by

management to be paid as a special dividend, which post tax implies a cash payout of Rs 1,600 to 1,700 crore, according to Nomura. This is lower compared with the 9 percent of overall company EBIT being sacrificed.

Fourth, even after grabbing high market share in the Indian low voltage motors market, why is Siemens not able to gain significant pricing power? The management while addressing queries of investors in its conference call on May 19 said that three to four companies, including Siemens, cumulatively dominate the Indian low voltage motors market with 50-70 percent market share, while the remainder market is held by smaller players. It added that the industrial motors are a commodity with insignificant pricing power. Thus, with commodity prices broadly stabilizing, pricing related top-line growth witnessed in FY22 and first half of FY23 may no longer be feasible in the long term.

Fifth, what investors most importantly seek answers to now are on the company's governance. This deal has created concerns for minority shareholders, arising on the fairness of valuation for businesses being sold to the parent and this deal being categorised as a related party transaction.

Along with Siemens, the street is now concerned about the valuations of the low voltage motors business for peers like ABB. Going by the commentary made by Siemens management that low voltage motors may witness mid single digit growth in the medium term, ABB could see a rerating. Nomura says, the motion segment accounted for 36 percent of EBIT in CY22 for ABB and this could weigh heavily on its growth prospects.

Siemens fell 8 percent in trade on May 22, in addition to 5 percent lost in the last hour of trade on May 19. Post this stock price correction, the stock has given up half of its gains made in calendar year 2023.