IPG takes back Russian laser subsidiary, pushes for growth and earnings

IPG Photonics (Nasdaq: IPGP) has purchased the remaining 22.5% minority interest in its Russian subsidiary NTO IRE-Polus, owned by RUSNANO, for $55.4 million in cash.

IPG bought a 31.6% minority interest in the NTO IRE-Polus subsidiary back in 2008, to focus on high-power fiber amplifiers and lasers with broad applications, and telecommunications equipment using proprietary fiber-optic technology. In Nov. 2010, RUSNANO paid $25 million for a 12.5% interest in IRE-POLUS to help expand the company's technology development and production, as well as develop sales channels. In June 2011, after the division had met certain revenue requirements, RUSNANO exercised an option to purchase an additional 10% stake for $20 million. IPG would have been able to buy back the minority stake in Dec. 2013, and RUSNANO had an option to sell in Dec. 2015, both at predetermined values.

"The proceeds from the original investment in NTO by RUSNANO allowed IPG to accelerate its investment in R&D, further develop our sales and manufacturing infrastructure in Russia, and enhance our presence in that region by leveraging RUSNANO's brand and network," said IPG CEO Valentin Gapontsev, in a statement. The two companies pledge to keep cooperating "in the long term."

For its part, RUSNANO says its $45M investment "contributed to a more dynamic development of the market in Russia, widening the range of fiber laser applications, finding new customers and penetrating into new industries," noted RUSNANO managing director Georgy Kolpachev. Specifically, the unit increased its production capacity fivefold, attracted new large domestic customers in shipbuilding, oil/gas, automotive, railways, consumer electronics, and telecommunications, and built eight new factory buildings, demo labs, and offices totaling 45,000 m². "The sale of its minority position meets two essential RUSNANO criteria for a successful exit: return on investment is higher than targeted hurdle rate, and the project is able to develop independently," explained the firm, which will invest the funds into unspecified new projects.

While the $55.4M pricetag might appear substantial, IPG certainly has the financial wherewithal to absorb it (net cash remains above $300M), and the unit should be "a significant growth driver and contributor to the company’s earnings long term," notes Stifel Nicolas analyst Patrick M. Newton. Moreover, IPG's buyback of its Russian subsidiary will directly help earnings, becoming accretive by 3Q12 -- net income attributed to RUSNANO's non-controlling interest had taken out $0.07/share of earnings in 2011, and $0.01/share (diluted) in 1Q12. Going forward, Newton is raising his estimates of IPGP's pro-forma EPS by four cents to $2.78/share in 2012, and by seven cents to $3.27 in 2013, without any increase in revenues ($558.2M and $650M, respectively).