Opinion | Hitachi’s ABB deal isn’t just an escape hatch
Done right, Hitachi may just have found more than just an out from Japan
Whenever a Japanese company acquires an overseas asset, the rationale is typically that it’s finding a way to survive the country’s aging demographics and shrinking returns.
But Hitachi Ltd’s 800 billion yen ($7.06 billion) purchase of ABB Ltd’s power grid business is bigger than that. The Hitachi-ABB deal, while on the expensive side, is high-margin for the Japanese industrial conglomerate, and could catapult it into the big leagues of power equipment globally.
Hitachi is nearing an agreement to buy around 80% of Swiss engineering giant ABB’s power grid unit, Bloomberg News reported, in a deal that values the entire business at $11 billion. That would be Hitachi’s largest-ever purchase.
ABB investors have long been underwhelmed by the power grid business, which is low-margin compared with the Zurich-based firm’s robotics and factory automation operations. On a sum-of-the-parts basis, the unit trades at around 9.8 times forward enterprise value-to-ebit, weighing on the Swiss firm’s overall multiple of around 12 times. Last year, power grids carried ABB’s lowest return on assets.
Combined with the Japanese conglomerate’s other industrial-equipment business, ABB’s power grids will allow Hitachi to compete neck-and-neck with General Electric Co. and Siemens AG.
With ABB’s power grids under its belt, Hitachi also could avoid the fate of so many other global industrial companies, which have struggled to turn their businesses around. As Japanese conglomerates increasingly talk about reforming to extract more value and shed the Japan discount, Hitachi has been ahead of the pack—selling units that no longer fit its strategy and putting more cash to work.
Hitachi has almost 800 businesses spanning everything from construction machinery to nuclear power plants and healthcare. It’s now cutting its subsidiaries by 40% to 500 companies, as the Nikkei reported earlier this year, and aims to focus on four core areas, of which power and energy is one.
Buying ABB brings Hitachi closer to its consolidated operating margin target of more than 10% by 2022, compared with 8% for the group and 6.5% for the power business currently. Other targets loom, too: The Japanese company is looking to almost double the sales in its power segment to more than 800 billion yen by March 2022 from around 450 billion yen.
ABB’s power grids will give Hitachi much-needed exposure overseas that past purchases haven’t quite succeeded at, especially after the company broke up its thermal-power business last year. Overseas sales made up just 3% of its nuclear subsidiary and 9 percent of other power units, according to Nomura Research analysts.
In getting its hands on more of the world’s power grid makers, Hitachi is acquiring an edge in the future of power. With its equipment, it could help drive the global shift from coal and nuclear, and answer calls for systems that can carry renewable energy.
Much of Hitachi’s mid-term plan is focused on this shift. ABB also has the kind of exposure to emerging markets Hitachi would love. And crucially, the $1.1 trillion Internet of Things market will need equipment to power it.
To be sure, execution is key. Hitachi’s overseas adventures have a reputation for being pricey, as it suffered rising indirect expenses from its deals. The fate of its nuclear plant in the UK and the potential funding difficulties it faces there have weighed on the stock. The company will have to show shareholders that this time is different.
But done right, Hitachi may just have found more than just an out from Japan.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Nisha Gopalan is a Bloomberg Opinion columnist covering deals and banking. She previously worked for the Wall Street Journal and Dow Jones as an editor and a reporter.
Anjani Trivedi is a Bloomberg Opinion columnist covering industrial companies in Asia. She previously worked for the Wall Street Journal.
This story has been published from a wire agency feed without modifications to the text. Only the headline has been changed.
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