Hitachi’s
ABB Deal Isn’t Just an Escape Hatch
Whenever a Japanese company acquires an overseas asset, the rationale is typically that it’s finding a way to survive the country's aging demographics and shrinking returns.
But Hitachi Ltd.'s 800 billion yen ($7.06 billion) purchase
of ABB Ltd.'s
power-grid business is
bigger than that. The deal, while on the expensive side, is high-margin for the
Japanese industrial conglomerate, and could catapult it into the big leagues of
power equipment globally.
Hitachi is nearing an agreement to buy 80.1% of Swiss
engineering giant ABB Ltd.’s power-grid unit, in a deal that values the entire
business at $11 billion. ABB has an option to sell its 19.9% stake three
years after the current deal — Hitachi's largest-ever purchase — is completed. ABB
noted that Hitachi would help provide access to new markets as well as
financing.
Combined with the Japanese conglomerate’s other
industrial-equipment business, ABB’s power grids will allow Hitachi to compete
neck-and-neck with General Electric Co.
and Siemens AG. With ABB’s power grids under its belt, Hitachi also
could avoid the fate of so many other global industrial companies, which
have struggled to turn their businesses around. As Japanese conglomerates increasingly talk
about reforming to extract more value and
shed the Japan discount, Hitachi has been ahead of the pack — selling units that no longer fit its strategy and putting more cash
to work.
Buying ABB brings Hitachi closer to
its consolidated operating margin target of more than 10% by 2022, compared
with 8% for the group and 6.5% for the power business currently. Other targets loom, too: The Japanese company
is looking to almost double the sales in its power segment to more than 800
billion yen by March 2022 from around 450 billion yen.
Hitachi has almost 800 businesses
spanning everything from construction machinery to nuclear power plants and
healthcare. It’s now cutting its
subsidiaries by 40% to 500 companies, as the Nikkei reported earlier this year, and aims to focus
on four core areas, of which power and energy is one.
ABB Management Commentary - “Power Grids will strengthen Hitachi
as global leader in energy infrastructure and Hitachi will strengthen Power
Grids’ position as a global leader in power grids. With this transaction, we
are realizing the value we have built through the transformation of Power Grids
over the last four years. Our shareholders will directly benefit through the
return of the proceeds of the divestment. Building on our existing partnership
announced in 2014, the initial joint venture will provide continuity for
customers and our global team’’
ABB investors have long been underwhelmed by the power-grid
business, which is low-margin compared with the Zurich-based firm’s robotics
and factory automation operations.
Announcing the deal, ABB spelt out a road map that
would chart a new course in industrial automation, electrification, robotics
and automation. Analysts said that in
mature markets, the power transmission and distribution (T&D) business has
limited incremental growth opportunities both in terms of orders and profits.
From a technology-driven solutions business earlier, it is now a converter of
raw material into finished goods, where there’s hardly any upside in margins.
ABB Management Commentary – ‘’Our four newly shaped businesses,
each a global leader, will be well aligned to the way our customers operate and
focus stronger on emerging technologies such as artificial intelligence. The
continued simplification of our business model and structure will be a catalyst
for growth and efficiency in our businesses. Our businesses will be further
supported through the transfer of experienced resources from today’s country
organizations’’
ABB: Shaping a leader focused in digital industries
Fundamental
actions to focus, simplify and lead in digital industries for enhanced customer
value and shareholder returns
Focus of portfolio on digital industries through divestment of
Power Grids
- Divestment of Power Grids to Hitachi expands existing partnership and strengthens Power Grids as a global infrastructure leader with enhanced access to markets and financing.
- Enterprise Value of $11 billion for 100% of Power Grids, equivalent to an EV/op. EBITA multiple of 11.2x1.
- Crystallizing value from the transformation of Power Grids including doubling operational EBITA margin since 2014.
- ABB initially to retain 19.9% in the equity of carved-out Power Grids to ensure transition; pre-defined exit option on 19.9 percent equity at fair market value with floor price at 90% of agreed Enterprise Value, exercisable by ABB three years after closing.
- Closing expected by first half of 20203.
- ABB intends to return 100% of the estimated net cash proceeds of $7.6-7.8 billion from the 80.1% sale to shareholders in an expeditious and efficient manner through share buyback or similar mechanism.
Simplification of business model and structure
·
Discontinuation of legacy matrix
structure
·
Businesses will run all
customer-facing activities as well as business functions and territories,
fostering ABB’s entrepreneurial business culture
·
Businesses to be strengthened by
transfer of experienced country management resources
·
Existing country and regional
structures including regional Executive Committee roles to be discontinued
after closing of the transaction
·
Corporate activities to be focused on
Group strategy, portfolio and performance management, capital allocation, core
technologies and ABB Ability™ platform
Shape four leading businesses aligned with customer patterns
• All businesses global #1 or #2 in attractive
growth markets:
* Electrification
* Robotics & Discrete Automation
* Motion
- ABB Ability™ tailored digital solutions will drive customer value in each business whilst capturing synergies through common platform.
- Actions position ABB with a leadership role in digital solutions, and evolving technologies such as artificial intelligence.
Latin Manharlal Group
