Important points from ABB:
Shaping leadership in electrification
- Acquisition will strengthen ABB’s #2 global position in electrification
- Non-core GE business with significant value creation potential within ABB
- Expands ABB’s access to the North American market through deep customer relationships, large installed base and extensive distribution networks
- Long-term usage of GE brand agreed
- Purchase price of $2.6 billion
- Potential for annual cost synergies of approximately $200 million
- ABB and GE establish long-term, strategic supply relationship for ABB products
- Operational EPS accretive in year one
- Closing expected in H1 2018
Why it matters:
This further consolidation in the electrical and automation businesses in Europe shows both ABB and Schneider Electric chasing Siemens to be the largest supplier in Europe—and by extension the world.
At a glance:
Consider ABB’s previous acquisition of B+R Automation strengthening its machine control presence, and Schneider Electric’s acquisition of Invensys giving it a process automation foothold with Foxboro. Schneider Electric’s interesting reverse acquisition of AVEVA and combining its software businesses such as Wonderware into a new company is an interesting twist in the strategy.
Look for further consolidation as these companies mature and growth slows. On the other hand, I expect to see interesting things from startups such as Bedrock Automation in hardware and Inductive Automation in software explore new technologies and business models that could be disruptive to the industry.
I continue to hear rumors that Honeywell Process Solutions is for sale. Would a Siemens or Schneider be interested in it to further compete on the automation side with Siemens?
Also, where would all this leave Rockwell Automation? It has clung to the strategy of “the world’s largest company devoted only to automation”. Does it need an acquisition under new CEO, and now chairman, Blake Moret?
GE Industrial facts:
GE Industrial Solutions has deep customer relationships in more than 100 countries and an established installed base with strong roots in North America, ABB’s biggest market. GE Industrial Solutions is headquartered in Atlanta, Georgia, and has about 13,500 employees around the world. In 2016, GE Industrial Solutions had revenues of approximately $2.7 billion, with an operational EBITDA margin of approximately 8 percent and an operational EBITA margin of approximately 6 percent.
ABB will acquire GE Industrial Solutions for $2.6 billion; the transaction will be operationally accretive in year one. ABB expects to realize approximately $200 million of annual cost synergies in year five, which will be key in bringing GE Industrial Solutions to peer performance. As part of the transaction and overall value creation, ABB and GE have agreed to establish a long-term, strategic supply relationship for GE Industrial Solutions products and ABB products that GE sources today.
“With GE Industrial Solutions, we strengthen our Number 2 position in electrification globally and expand our access to the attractive North American market,” said ABB CEO Ulrich Spiesshofer. “Combined with the long-term strategic supply relationship with GE, this transaction creates significant value for our shareholders.”
He added: “Together with the GE Industrial Solutions team, we will execute our well-established plans in a disciplined way to bring this business as part of the global ABB family back to peer performance. With this next step of active portfolio management, we continue to shift ABB’s center of gravity, in line with our Next Level strategy, by strengthening competitiveness, mainly in the North American market, and lowering risk with an early-cycle business.”
“This combination brings together two global businesses with a broad complement of electrical protection and distribution assets,” said John Flannery, CEO of GE. “ABB values our people, domain expertise, and our ability to operate in the segments where we have depth and experience. GE will also benefit through an expanded strategic supply relationship with ABB as the two companies work together.”
GE Industrial Solutions will be integrated into ABB’s Electrification Products (EP) division, resulting in a unique global portfolio and very comprehensive offering for North American and global customers. They will benefit from ABB’s innovative technologies and the ABB Ability digital offering coupled with GE Industrial Solutions’ complementary solutions and market access. Included in the acquisition is a long-term right to use the GE brand. ABB will retain the GE Industrial Solutions management team and build upon its experienced sales force. After closing, this transaction will have an initial dampening effect to EP’s operational EBITA margin. ABB commits to returning EP to its target margin corridor of 15-19 percent during 2020.
Tarak Mehta, President of ABB’s EP division, said: “This acquisition strengthens our position as partner of choice for electrification globally and in North America. We look forward to working with GE Industrial Solutions’ and ABB’s customers and channel partners to create new opportunities in this highly attractive core market for our division. We have a clear integration plan to realize the synergies of this combination and to bring our combined business back into the target margin corridor during 2020.”
Given this transaction, ABB has decided to put the previously announced share buyback program on hold.
The transaction is expected to close in H1 2018, subject to customary regulatory clearances. Credit Suisse and Dyal Co. acted as financial advisors to ABB, and Davis Polk & Wardwell provided legal counsel.