Business / Corporate

Hitachi and Switzerland's ABB confirm talks on potential power grid deal

Bloomberg

ABB Ltd. and Hitachi Ltd. have said they are in talks toward a deal on power grids, after the Swiss engineering giant was reported to be considering putting the division on the block earlier this year.

ABB is in discussions with Hitachi to expand and re-define an existing strategic power-grid partnership between the two companies that dates to 2014, it said in a statement Wednesday. Hitachi made a similar statement after trading hours in Tokyo. It’s the first time either has commented on a potential transaction.

The Nikkei business daily reported Wednesday that the Japanese conglomerate is preparing to buy the business for as much as ¥800 billion ($7 billion). An agreement could be reached as early as this month after a final assessment, the newspaper said in a later update Thursday, after earlier saying it could be this week.

Hitachi shares declined as much as 1.4 percent on Thursday in Tokyo after reversing early gains of 2.4 percent. ABB rose 4 percent in Zurich trading Wednesday, the most in almost eight months, giving it a market value of about $43 billion.

A move by Hitachi to buy ABB’s power grids business would boost its position in the growing power transmission and distribution sector, and help it diversify away from its nuclear plant business. Chief Executive Officer Toshiaki Higashihara has been restructuring the diversified company by spinning off some assets. The company is vying to become one of the top grid companies in the world, according to a June presentation.

With the global nuclear industry beset by overruns, heightened competition from natural gas and renewables, and stricter rules in light of the Fukushima nuclear disaster, Hitachi’s atomic reactor sales have dried up.

Any agreement would add to the $3.5 billion of announced acquisitions Hitachi has been involved in over the last three years, according to data compiled by Bloomberg, with the biggest being last year’s $1.25 billion purchase of units and assets from Accudyne Industries.

ABB was considering the sale of the power-grid business and discussing options with advisers, according to media reports in August. The division’s implied valuation was more than $10 billion following productivity and margin gains, according to a Bloomberg Intelligence analysis the same month. The Financial Times reported last month that the unit was worth about $13 billion, citing analysts.

ABB plans to spin off the unit into a separate company, Nikkei said Thursday. Hitachi aims to invest in this entity in stages and eventually make it a wholly owned subsidiary to help mitigate risks from changes in the business environment, it said. In its report late Wednesday, Nikkei had said Hitachi was expected to initially take a stake of about 50 percent before turning it into a subsidiary.

The sale of the business that makes power transformers, long distance electricity-transmission systems and energy storage units would shrink ABB by about a quarter. It would also vindicate activist Cevian Capital AB, which has been pushing for a breakup of the company for years and particularly a separation of that division. After conducting a strategic review, CEO Ulrich Spiesshofer defied the investor in 2016 by deciding to hang on to the laggard unit.

The power grid business is worth “much, much more today” than the $4 billion to $5 billion valuation it was given in 2016, Spiesshofer told analysts in July, arguing that it was a good decision to have kept it in the portfolio. He simultaneously signaled a willingness to separate from the business, saying ABB’s portfolio isn’t “cast in stone.”

ABB’s most recent quarterly results, published in October, fell short of expectations as demand for industrial equipment slowed in the Middle East and the U.K. and an overhaul of power grids remained a work in progress.

The profit margin widened at the division to 10 percent, just enough to reach the bottom end of a goal, but significantly below that of the company’s other three businesses.