Analysis: Chipmaker rebound holds lessons for German Q-Cells

FRANKFURT (Reuters) - Nedim Cen and Peter Bauer have more in common than being CEOs of German tech companies: Cen, who heads solar cell maker Q-Cells, and Bauer, CEO of chipmaker Infineon, are both seen as turnaround men.

Now analysts want Cen to take a page out of Bauer's book on how to rescue a company from the edge: Q-Cells, once the world's top maker of solar cells, trades at a tiny fraction of a high hit in late 2007 and clearly needs transformation.

Cen and Bauer could not be more different from each other. Cen, 44, who has Turkish roots, joined Q-Cells in early 2009, having previously worked with restructuring consultancy Alvarez & Marsal, and later became CEO with a mandate to revamp.

The soft-spoken and mustachioed Bauer, who turned 50 in June, is a life-long chip specialist who grew into the role of a restructurer. Bauer, during his time at Siemens and at Infineon

before he was picked to lead the chipmaker, had the happy fortune to head a profitable business.

But early results of Cen's initiatives at Q-Cells suggest a Bauer-style revamp could work.

Q-Cells has started to streamline, selling its stake in a venture to produce solar modules and cutting jobs, and operating losses have narrowed.

"Just like Infineon in the past, Q-Cells has the correct strategy. But while the end-market has picked up for Infineon in terms of prices, this still has to happen for Q-Cells," said JP Morgan analyst Sandeep Deshpande, who covers both companies.

About two years ago, Infineon piled up billions of euros of losses as chip prices collapsed. A similarly strong plunge in solar cell prices led Q-Cells to a record 1.4 billion euro ($1.76 billion) loss last year.

Q-Cells and Infineon both operate in highly cyclical sectors and produce high-tech products. Q-Cells is now the world's No.4 maker of solar cells, Infineon is the fourth-largest maker of memory chips.

Both were thrown into crisis after prices for their key products -- memory chips and solar cells -- plunged amid an oversupply, leaving them undercapitalized and leading to a management shakeout.

Q-Cells, at 6 euros, is now only worth a tiny fraction of its all-time share price high of 102.85 reached in late 2007, the peak of the solar bubble before it burst in 2008.

Infineon, having soared to 83.45 euros during the dotcom boom in 2000 and fallen to penny stock level at 0.34 euros, now stands at 5 euros and is considered a healthy investment again.

BLUEPRINT FOR Q-CELLS

Infineon, through a mixture of strict cost cuts, divesting loss-making businesses and a successful capital hike -- was able to manage a turnaround successfully.

After the insolvency filing of former unit Qimonda, it effected a round of painful cuts, slashing costs by 200 million euros by end-2009 and taking out some 3,000 jobs -- about 10 percent of its workforce.

Q-Cells has started to streamline its operations, selling its stake in Sovello, the modules venture with REC and Evergreen Solar, and cutting jobs by a fifth.

Still, one thing remains for Q-Cells to be done. The last piece of the turnaround puzzle at Infineon had been a capital increase. At Q-Cells, such a move would also help refinance a convertible bond.

"Balance sheet is a key concern and despite the expected earnings improvement we do not expect that Q-Cells can refinance the 2012 convertible alone from operating cash flow. The company needs sufficient funding to keep market share in its core cell business," Credit Suisse analyst Karsten Iltgen wrote.

In the current environment -- which has seen investor confidence in the solar sector disappear due to looming subsidy cuts in Germany, the world's largest market -- this could prove to be a difficult task.

"Q-Cells should -- and in my view, will -- carry out a capital increase by the end of the year. But that will only work if end-market prices will rise," JP Morgan's Deshpande said.

But the company could also follow Infineon's example here, as the chipmaker was able to secure the support of U.S. investor Apollo when it launched its capital hike almost exactly a year ago, thereby calming nervous markets.

Since then, database StarMine shows, analysts covering the stock have on average shifted to rate the stock either "buy" or "hold," from "sell" or "hold."

"I wouldn't be surprised if Q-Cells's refinancing model would include a capital measure, possibly a capital hike. And of course, it would make sense if they got a bigger German bank or outside investor on board to do that," said Karsten von Blumenthal, analyst at SES Research.

Like with Bauer, Cen's easygoing personality has helped make the revamp more palatable.

"He knows what he wants, but he does it in a very pleasant manner," said an analyst who did want to be named.

(Editing by Sitaraman Shankar)