Deal Reporter
• Robotics division seen as high priority for M&A to add to Gomtec buy
• De-merger rumours resurface after Cevian becomes second biggest owner
• Potential for dividend or buybacks increase – bankers, analysts
ABB [VTX:ABB] is likely to favour small, bolt-on transactions over large M&A in the near future as attention turns to a possible break up, bankers and analysts said. M&A activity could be led by the Robotics division of ABB’s automation arm as the company seeks to hold off competition, they said.
The entrance of Swedish shareholder Cevian is being watched for signs the activist could persuade the automation and power group to de-merge into two units focused on automation and energy transmission, or continue to raise its dividend, the bankers and analysts said.
Cevian has been active in influencing splits, sales and disposal processes of the large corporates it invests in rather than large acquisitions, with ABB unlikely to be an exception, a banker following the situation said. This indicates ABB’s relatively humble acquisition programme is not likely to change, he said.
Cevian became ABB’s second largest shareholder when it notified it holds a 3.1% stake as of 27 May, behind Swedish investment firm Investor’s 9.3%. Cevian could feel ABB is fundamentally undervalued due to the drag of a conglomerate discount, the banker said. Cevian declined to comment.
Separating the units could be attractive to investors, but management has quashed similar rumours before, one of the analysts said. Rather, management could respond by pushing for ABB to continue raising its dividend and pursuing bolt-on M&A.
ABB can easily afford to continue its dividend policy while stepping up M&A, a second analyst suggested. Recent divestments have freed up cash, he noted. ABB reported USD 2.9bn free cash flow in FY14.
ABB has for some years been committed to an extensive share buy-back programme and communicated during its last financial results that it would raise its dividend again. ABB increased dividends from FY05 CHF 0.12 per share to FY14 CHF 0.72, giving a compound annual growth rate of 22%.
Shareholders do not seem to be putting pressure on ABB to engage in large-scale acquisitions, the analysts and a banker close to the company said. Importantly, there are few large strategic targets that would provide enough synergies to compensate for costs and risks, the analysts said.
Should ABB raise its low gearing from 0.3x EBITDA to 1x EBITDA or just above, it could free up about USD 5bn of cash towards acquisitions in the next twelve months, the analysts and banker close said. ABB's current gearing is low compared to listed peers like Atlas Copco [STO:ATCO] (0.5x) and Scheider Electric [EPA:SU] (1.3x), according Dealreporter analytics.
ABB is already present in the US, where the strong currency could mean any activity on that side of the Atlantic would be untimely, the first analyst said. Instead, small bolt-on acquisitions for certain divisions will allow ABB to gain their hands-on skills and niche products, the analysts said.
Recent acquisitions have included Dutch liquid flow measurement company Spirit IT in 2014, and French software company Newron in 2013. ABB’s most recent transaction was the purchase of German collaborative robotics company Gomtec. Transaction values were not disclosed.
ABB would likely have considered acquiring Masternaut, the European telematics company specialising in fleet and workforce management, a source familiar with Masternaut said. Masternaut was eventually acquired by Summit Partners and FleetCor Technologies [NYSE:FLT].
Robotics deemed high priority
ABB is likely to continue pushing the growth of its Robotics division within the automation unit of the group, the bankers and analysts said. Management is actively looking for value-added targets for Robotics, the banker close said, adding this is an area of “absolute priority” for ABB.
ABB acquired Gomtec in April. Similar acquisitions would be strategic to keep ahead of competition, the analysts said. The target universe is complex and made up of several small start-ups at which developments and intellectual property (IP) are in their infancy, the banker close said.
Gomtec complements ABB’s portfolio of human-robot collaborative automation technologies that already include YuMi, the world’s first truly collaborative dual-arm industrial robot designed to expand automation for small-parts assembly.
ABB formally introduced YuMi last month at the Hannover Messe in Germany. Gomtec develops mechatronic systems combining mechanical, electrical, telecommunications, control and computer engineering.
There are a number of potential targets in the space, especially if small VC-backed companies and IP in development can be considered, the banker close said. However, as ABB is keen to achieve economies of scale and roll out significant volume, smaller targets might not be cost effective, he explained.
The few recent transactions in the space have been valued at high multiples. These include Denmark's Universal Robotics being sold to Terrapin [NASDAQ:TRTL] for 5x revenue in May. The costs and risks of M&A generally still outweigh developing robotics in-house, one of the analysts suggested.
A well-integrated target could help ABB strengthen current customer relations and gain a stronger product platform, this analyst said. Companies with robotics that are similar to YuMi, but with different sensors that can perform different activities, would be advantageous for ABB, he said.
Universal Robotics would have made a good acquisition for ABB due to good product overlap, the analyst said. According to ABI Research, Universal Robotics is the market leader in collaborative robotics, holding 71% of the market.
There has also been perennial market speculation about ABB taking over German robotics company Kuka [ETR:KU2], a second banker following the situation and the analysts said. Strategically, Kuka would fit well into ABB, this banker said. However, Kuka’s ownership structure, valuation and potential regulatory issues could keep ABB at bay, the banker and the analysts said.
Despite certain synergies in products and development but from a cost-perspective, ABB might make more profit from selling its components to Kuka rather than owning the end products, the second analyst argued.