Can Energy Mad pull a Charlies? Woodward says takeover "likely"

Energy Mad is the NZX's first tech IPO since Xero went public in 2007 - but could fast-changing technology trends hurt its dream of a Charlies-style buy-out?

This week, Energy Mad's investment bank - boutique outfit Woodward Partners -  has been hustling ahead of the IPO's Friday 5pm September 23 deadline.

Energy Mad's 20% float values the Christchurch-based maker of energy efficient light bulbs at around $30 million.

For its year to June 30, the company made $815,000 net profit after tax on revenue of $8.6 million (half of it generated through sales in Australia). It projects it will start paying a dividend in 2013, when it predicts it will turn a $4 million profit on $21 million revenue.

Takeover offer "likely"
The numbers are relatively modest, but Woodward’s Mark Donnell holds out a more alluring prospect.

“In the long-term there is very likely to be an Asahi-Charlies type takeout,” Mr Donnell told NBR (the Japanese brewer’s $129 million offer for Charlies – which went unconditional on August 12 – represented a 55% premium on the Kiwi juice maker’s share price before the deal was announced in July).

"Realistically, we expect one of the big multinational players like Philips, Osram, or GE, will make a takeover offer for Energy Mad within three or four years," Mr Donnell told NBR.

The LED threat
But is it realistic?

One of Mr Donnell's mooted buyers, Philips, has recently been pushing home LED (light-emitting diode) lighting to NBR.

In the Dutch multi-national's world view, as soon as 2015, 50% of the global market will have moved to LEDs, and 80% by the end of the decade. Although costly (averaging around $35) up-front, Philips maintains LEDs work out more cheaply in the end because of their energy efficiency and super-long (20,000-hour) lifespan. And unlike CFLs, they have no mercury (a greenie no-no), and they light instantly.

Energy Mad’s bulbs are examples of compact fluorescent lamps (CFLs), the squiggly eco-bulbs now familiar to supermarket shoppers everywhere.

Many companies make CFLs, Energy Made – which manufacturers in a Chinese factory co-owned with a local partner – says its tweaked design makes for smaller, brighter, more energy efficient and longer lasting bulbs.

The design is patent-protect in the US, China, Europe, Australia (where Energy Mad bulbs are now in an estimated 900,000 homes) and New Zealand (500,000).

If Philips is right, and LEDs are the Next Big Thing in home lighting – or even if the Dutch multi-national simply believes its right – could Energy Mad’s CFL technology get sidelined?

The company’s prospectus cites a study by Global Industry Analysts that says sales of energy-efficient bulbs in New Zealand, Australia, the US and Europe are forecast to grow from $3.75 billion in 2010 to $8.2 billion in 2015 – a compound annual growth rate of 17% per annum.

Mr Mardon said LED’s prohibitive up-front cost had led to “close to nil” market share amid this mass shift away from traditional incandescent bulbs.

But won’t economies of scale kick in at some point as Philips and other LED advocates ramp up production?

Mr Mardon – who holds a mechanical engineering PhD – maintained that economies of scale had already kicked. Further, that LEDs, which run hot, requiring heavy heat syncs or even fans, were inherently more complex and expensive to manufacture, just as a luxury car will always be more expensive to make than a basic sedan. Replacing a 60W incandescent light bulb could cost $80.

Investment banker Mr Donnell notes, however, that Energy Mad is not adverse to more expensive bulbs. The company is close to manufacturing “a new Ecobulb that offers the advantages of an LED (very long life, dimmable) with the advantages of a CFL (runs cold, so can insulate right up to and over the light). 

The new bulb will retail for around $30. “And that's with a very handsome margin to Energy Mad,” Mr Donnell adds.

Banks not interested

Before the global financial crisis hit, Energy Mad had $2.5 million drawn on a $10 million overdraft, managing director Chris Mardon told NBR.

"But when the GFC arrived, we had to pay it back within 24 hours."

With the $10 million over-draft no longer on tap, the Christchurch-based eco-bulb was forced to stop chasing large orders, Mr Mardon said.

"After our IPO, banks will be lining up to lend us money," Mr Mardon said. "But then we won't need it"

The $6 million to $10 million raised by the public listing will go toward working capital.