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ABB in Cevian’s Sights May Result in Push to Break Up: Real M&A
2015-07-21 22:05:34.848 GMT


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By Alex Webb
(Bloomberg) -- ABB Ltd., formed in 1988 with the merger of
Swiss and Swedish industrial giants, may soon come under
pressure to split in two again.
Activist investor Cevian Capital AB has built a 5.1 percent
stake in ABB, making it the second-biggest shareholder in the
$48 billion company. That may be a prelude to pushing for a
breakup or other changes at the world’s largest maker of power
grids, according to a person familiar with Cevian’s plans, who
asked not to be identified discussing the Swedish investment
firm’s possible strategy.
With faster growth projected for ABB’s automation
operations and its power business facing decline, a split may
make sense, said William Mackie, a London-based analyst at
Kepler Chevreux. Automation specialists have an enterprise value
of about 2.3 times revenue, compared to a multiple of about 1
for power-equipment makers, according to Mathias Leijon, chief
investment officer at ABB shareholder Nordea Bank AB. ABB now is
valued at about 1.3 times its revenue in the past 12 months.
Cevian may decide just to push for cost cuts and improved
operational efficiency, according to someone who has worked with
Cevian in the past. ABB’s earnings before interest, taxes,
depreciation and amortization declined to 12 percent of revenue
last year from a high of 15.8 percent in 2011. Competitor
Rockwell Automation Inc.’s adjusted Ebitda last year was 21
percent of revenue, according to data compiled by Bloomberg.
“If we don’t see a margin progression towards 16 percent-
plus and a very prudent capital allocation, which drives cash
return, then I think one should be very open to the idea that
the structure is too complex,” said Nordea’s Leijon. Nordea is
the 10th-biggest ABB shareholder, according to data compiled by
Bloomberg. “If they don’t deliver that, then we believe there’s
probably a case to break up the company, and we should know that
within the next 18 to 24 months.”

Track Record

Sandra Wiesner, a spokeswoman for Zurich-based ABB,
declined to comment, as did a representative for Cevian. ABB
will report second-quarter earnings results on July 23.
Cevian pushed through a similar transformation at Metso
Oyj, the Finnish maker of rock crushers and mining equipment.
In 2013, Metso spun off its less profitable paper, pulp and
power unit, a move that was broadly welcomed by investors.
The Stockholm-based investor has a track record of buying
enough shares to earn a seat on the board, and has installed
managers at German steelmaker ThyssenKrupp AG and industrial
services specialist Bilfinger SE in the past year.

Laggard Stock

ABB shares have performed worse than any of the company’s
main peers during the past five years. The stock gained just 1.2
percent in that time, while Rockwell and Honeywell International
Inc. more than doubled. Siemens AG and General Electric Co. also
did better.
At ABB, “the power portfolio is low-growth and under
competitive pressures,” Kepler Cheuvreux’s Mackie said in a
phone interview. Significant parts of the automation business --
comprising businesses such as software, systems, drives, motors,
inverters and robotics -- should comfortably sustain 3 percent
to 5 percent growth and operating margins up to 20 percent over
the next decade, he added.
“Creating specialized companies could make sense,” said
Volker Stoll, an analyst at Landesbank Baden-Wuerttemberg in
Stuttgart, Germany. “A sum-of-the-parts valuation, particularly
when it comes to making strategic decisions, can be higher as
stand-alone businesses than as part of a bigger conglomerate.”

Wallenberg Stake

The January death of Peter Wallenberg might mean that the
appetite for transformational change is greater at Investor AB,
the largest ABB shareholder. The patriarch of the family, which
controls Investor, had helped establish ABB in 1988 by merging
Sweden’s ASEA with Switzerland’s Brown, Boveri & Cie.
Stefan Stern, a Stockholm-based spokesman for Investor AB,
declined to comment when asked about the firm’s stake in ABB.
“We prefer to discuss company strategy directly with
management than through the media,” he said in a telephone
interview.
An ABB breakup might allow Cevian to then push to combine
the automation business with ThyssenKrupp’s. The board of Kuka
AG, which competes with ABB in the robotics market, may also be
open to a merger, according to a person familiar with the German
company’s strategy. It might be difficult, though, to seal
antitrust approval for such a deal, said the person, who asked
not to be identified discussing possible deals.
A representative for ThyssenKrupp declined to comment, as
did a spokeswoman for Kuka.
Even if the two businesses split apart without any further
deals, operating as separate companies would allow them to
allocate capital more quickly and better react to competition,
according to Nordea’s Leijon. “The more focused you are, the
better it is,” he said.

For Related News and Information:
ABB Plans $4 Billion Buyback to Boost Underperforming Stock
ABB Beats Estimates as Power Systems Unit Returns to Profit
Peter Wallenberg Sr., Swedish Creator of Companies, Dies at 88
Cevian Builds ABB Stake to Become Second-Biggest Shareholder
Scrolling industry stories: NI INDUSTRIES <GO>
Real M&A columns: NI REALMNA <GO>
Bloomberg Intelligence, multi-industrials: BI MULTG <GO>
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--With assistance from Aaron Kirchfeld in London.

To contact the reporter on this story:
Alex Webb in Munich at +49-89-24447-8802 or
awebb25@bloomberg.net
To contact the editors responsible for this story:
Beth Williams at +1-212-617-2307 or
bewilliams@bloomberg.net;
Simon Thiel at +44-20-3525-2814 or
sthiel1@bloomberg.net
Simon Thiel