In a bet it can improve the division’s lackluster margins over the next five years, Power grids maker ABB is buying General Electric’s Industrial Solutions business for $2.6 billion the Swiss engineering company said.
Including an agreement for long-term use of GE’s brand and a strategic partnership, Zurich-based ABB sees potential for annual cost benefits of $200 million with the deal. The GE business had sales of $2.7 billion in 2016.
power supply equipment for facilities including data centers, components for lighting control, circuit breakers and switchgear are among the products made by GE. Similar products are also included in ABB’s portfolio.
ABB is seeking to gain access to GE’s larger installed base of electrical installations worldwide and better penetrate the North American market.
ABB pledged to upgrade aging products with its own technology to help arrest a declining U.S. market share and said the business had been “an unloved child”.
Its position as the second-biggest supplier of electrical components behind France’s Schneider Electric would be bolstered by the deal and ABB is suspending its $3 billion share buyback program as part of the deal.
At the Georgia-based GE unit, ABB is also wagering on being able to cut costs and boost profitability.
“The key rationale of the integration is, first we will make this business better. And then afterwards, we will make this business bigger and better,” said ABB Chief Executive Ulrich Spiesshofer.
Integration costs of $400 million is expected by ABB.
Noting less than half the 15 percent operating margin at ABB’s comparable Electrification Products division, the GE unit’s operating earnings before interest, taxes and amortization (EBITA) are just 6 percent of sales.
Only after striking a supply partnership where ABB and GE will increase buying and selling from each another, the agreement was made, Spiesshofer said.
“Without that, the economics wouldn’t have worked,” he told reporters on a call. “With the supply partnership, the economics at the price of 0.9 times revenue is working.”
Pressure to sell assets and focus on higher-margin businesses by GE has been put by activist investor Nelson Peltz’s Trian Fund Management.
But given the GE business’s low profitability, the price was surprisingly high, some analysts said.
“GE Industrial Solutions isn’t in top shape, so ABB has its work cut out for it,” said Zuercher Kantonalbank analyst Richard Frei.
ABB did not need to raise equity capital as the company said it would finance the deal — likely its last for some time — with cash. Its shares were little changed in early trading.
Sources reportedly familiar with the matter had told the media in August that after moderating its price expectations, GE had resumed negotiations to sell the business to ABB.
While Davis Polk & Wardwell provided legal counsel, Credit Suisse and Dyal Co acted as financial advisers to ABB.
(Adapted from Reuters)