Siemens AG, Europe’s largest engineering company, is exploring options for its Osram lighting business, including a possible initial public offering or sale, according to three people with knowledge of the discussions.

Siemens, based in Munich, has held preliminary talks with investment banks about the viability of a transaction involving Osram, said the people, who declined to be identified because talks are private. No decision has been made and Siemens may keep the unit, they said. Siemens may consider an IPO or sales process for the first half of next year, said one of the people.

Siemens is examining Osram’s future as the IPO market shows signs of thawing and the unit’s earnings surge, rising six-fold in the past fiscal year. Osram, the second-largest lighting company in the world by sales after Royal Philips Electronics NV, has an enterprise value of 6.5 billion euros ($8.7 billion) to 7 billion euros, according to an estimate by Morgan Stanley analyst Ben Uglow in London.

“Over the next two to five years, Osram will require a significant level of investment to make it best in class,” said Uglow, who rates Siemens “overweight.” “The debate at Siemens is whether Osram is strategic enough to invest that cash, or if it should deploy the means somewhere else.”

Siemens spokesman Marc Langendorf declined to comment. Siegfried Russwurm, head of Siemens’s industry division, said last month in an interview that while Osram is “close to my heart,” Siemens routinely reviews its assets and “nothing is sacred.”

Improved Results

Osram’s results improved more year-over-year than at any other divisions in the industry business as higher demand coincided with a better cost structure. Siemens cut about 5,000 jobs at Osram in the fiscal year ended Sept. 30, 2009. The unit has almost 40,000 employees globally.

Osram’s fiscal full-year earnings jumped more than six-fold to 569 million euros on higher sales of 4.68 billion euros, helped by demand for light-emitting diodes and automotive products. The unit’s margin of 12.2 percent in that period exceeded for the first time in at least five years its target of a 10 percent to 12 percent margin.

A deal involving Osram would be Siemens’s biggest structural change since the company sold its VDO automotive unit to Continental AG for 11.4 billion euros in 2007. A sale would also bring Siemens close to a total withdrawal from consumer- oriented products, after giving up mobile phones and moving its home-appliance unit into a joint venture.

The engineering company yesterday said that it will divest its computer-services unit SIS to Atos Origin SA in an 850 million-euro transaction, nine months after first announcing to create a separate entity from the business and considering a sale. The unit had 35,000 employees in March, and the division has been unprofitable for years.

Siemens’s other consumer product is hearing aids, which the company considered selling before shelving the plan earlier this year.