Commentary: Cree acquires Ruud Lighting and BetaLED subsidiary

The cover of the May/June 2007 issue of LEDs Magazine featured a large photo of an outdoor LED lighting fixture from BetaLED, linking to our report from the Lightfair 2007 tradeshow. This discussed, among other things, BetaLED’s launch of its LED fixtures, as well as the indoor LED lighting products launched by LLF, Inc. Now, following Cree’s acquisition of Ruud Lighting (BetaLED’s parent) for an estimated net cost of approximately $525 million, both LLF and BetaLED are part of Cree’s lighting division (Cree acquired LLF in March 2008).

So is Cree an LED maker, or is it becoming a lighting company? LEDs Magazine asked Chuck Swoboda, CEO of Cree, how the company should be described. “We’re an LED lighting company,” he said. “This hasn’t changed.” However, it’s clear that the proportion of lighting products versus LED components has changed.

Because the Ruud deal is already finalized, the company’s revenue will be added to Cree’s balance sheet right away. Taking a snapshot of the current position (without factoring in any growth), we estimate that lighting now represents about 20-25% of Cree’s revenue, while the LED components segment represents a further 65-70%. (For more on this, see the “Number crunching” section below).

Of course, Ruud was originally a “traditional” – by which we mean “non LED” – lighting company, but through its BetaLED product line, the company was one of the first to transform the majority of its business to LED-based systems. The BetaLED launch at Lightfair 2007 was the result of building a dedicated team to focus on LED products. Cree and BetaLED have been working closely together for around 6 years. Swoboda said that more than 60% of Ruud’s business is now LED based, and that the LED side of the company grew by 50% last year. “100% of their investment is in LED development,” Swoboda said. “They are building [LED-based] products that make traditional products obsolete.”

Benefits

So what are the benefits of the deal? Well, obviously Cree has bought a successful company and brands, and gains a much broader range of LED lighting products. Both companies will benefit from the combination of their technology, their products and brands, and their sales infrastructure.

As well as selling BetaLED’s products, Cree also wants to sell more LEDs, and not just internally via BetaLED. A phrase used several times by Swoboda was that the deal will “accelerate the adoption of LED lighting.” In Cree’s view, the deal will help Cree to “drive the market,” creating and expanding opportunities for LED lighting. “We are still at a very early stage of penetration; LEDs are a tiny percentage of the overall market,” said Swoboda. “We still have to keep proving the benefits of LEDs.”

The reasoning appears to be that the combined Cree-Rudd can do a better job of building a market for LED products (both systems and components) by competing effectively with traditional lighting companies. “We see our competition as companies using technologies like metal-halide lamps. This is our focus,” said Swoboda. “We don’t have a legacy lighting business to protect.”

Cree also uses the reasoning that the LED lighting market is not moving fast enough by itself, and needs stimulation in the form of companies that can demonstrate and supply suitable LED-based components and systems. By “accelerating the adoption” of LED lighting, this benefits the market as a whole i.e. Cree as well as its LED-focused competitors. Similar reasoning was used (at the component level) when Cree first launched packaged LED products more than seven years ago.

Swoboda said that a combined component-system approach to the market, which Cree has employed since it bought LLF, can be very beneficial. “We gain additional knowledge [about the lighting systems market] and understand customer requirements,” he said. “This helps us build better components.”

However, it seems reasonable to ask whether there will be concerns about the deal among luminaire makers who buy LEDs from Cree and compete directly with BetaLED. Will these luminaire makers still want to share their market knowledge with Cree? Perhaps some will be concerned with supply issues and the availability of the best-performing/newest components. (Of course, similar issues are always raised when this type of acquisition or merger occurs).

Swoboda acknowledged that there may be an “emotional” reaction, at least initially. “However, we think that customers will still want to use the best LEDs,” he said, adding that Cree’s track record as a component supplier will speak for itself. “Our clear strategy is that the component business has to enable our customers to be successful.”

He also pointed out that many of Cree’s competitors – Philips, Osram, Zumtobel, a number of Chinese manufacturers – have a large degree of vertical integration within their organizations.

So, this appears to be Cree’s big challenge, now that it has become more vertically integrated (in the sense of becoming more of a lighting company) – to grow the Ruud/BetaLED business, while also maintaining its position as one of the leading suppliers of LED components.

Number crunching

For its fiscal year 2011, ended June 26, 2011, Cree reported total revenue of $987.6 million, which represented a 14% increase compared to revenue of $867.3 million for fiscal 2010. Of the FY2011 total, around 90% (approx. $890 million) was from LED products, with the rest from power and RF products. Within LED products, revenue from LLF was around $80 million.

Because the deal has already closed, Ruud will contribute about $20 million in revenue to Cree’s balance sheet for the remaining 40% of the current quarter. So for the purposes of this snapshot calculation, we can extrapolate this figure to $200 million annually. Of course this does not include any growth (or decline).

The combination of LLF and Ruud is worth around $280 million, from total revenue of around $1.2 billion, which allows us to estimate that Cree’s lighting business represents about 20-25% of the company’s revenue. In comparison, the LED components segment represents a further 65-70%.

Cree acquired all of the outstanding stock of Ruud Lighting for an estimated net cost of approximately $525 million, which includes $372 million in cash, $211 million in stock (6,074,833 Cree shares valued at the market closing price on Aug 17 of $34.74/share), and other payments, offset by tax benefits.

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