Hitachi Ltd. is making its biggest ever acquisition by agreeing to purchase the power grid division of ABB Ltd., a deal that’s aimed at turning the Japanese conglomerate into a top global provider of equipment for electricity networks.
Hitachi will acquire 80.1 percent of the business with an enterprise value of $11 billion (£8.7bn). ABB, which will own the remainder of business, plans to return $7.6 billion to $7.8 billion through a share buyback or other measures, it said Monday.
The sale of the business — which makes power transformers, long distance electricity-transmission systems and energy storage units — would shrink ABB’s revenue by about a quarter and leave the Swiss engineering giant more focused on robotics and automation. For Hitachi, the move is part of Chief Executive Officer Toshiaki Higashihara’s efforts to restructure the diversified company, which is vying to become one of the top grid companies in the world, according to a June presentation.
Shares of Hitachi fell 1 percent in Tokyo trading Monday, valuing the company at about $27 billion. The company will fund the purchase through funds on hand and loans.
ABB has an option to sell its 19.9 percent in power grid, three years after the deal is completed, the European company said. About $500 million in non-operating restructuring charges will be made in the next two years, it said.
With the sale of power grids business, ABB will focus on four leading sectors and simplify its organizational structure as it increases efficiency. The company will disclose more details at its fourth-quarter earnings announcement in February, ABB said.
A divestment would also meet a longtime demand of activist investor Cevian Capital AB, which became a major ABB shareholder more than three years ago. After conducting a strategic review, Chief Executive Officer Ulrich Spiesshofer defied the investor in 2016 by deciding to hang on to the division, arguing the business was significantly undervalued.
Change of Plan
That stance changed this year after the value of the power-grids business rebounded following productivity and margin gains, prompting ABB to work with advisers to consider options, people familiar with the matter said in October. The business generated $7.1 billion in revenue in the first nine months of 2018 and a profit margin of 9.8 percent, the lowest of its four units.
ABB and Hitachi said last week that they were in discussions to expand and redefine an existing strategic power-grid partnership that dates to 2014, without providing details on the terms.
The acquisition will bolster Hitachi’s position in the growing power transmission and distribution sector, and help it diversify away from its nuclear plant business. The company’s atomic reactor sales have dried up as the global industry is beset by overruns, heightened competition from natural gas and renewables, and stricter rules following the Fukushima disaster.
Any agreement would add to the $3.5 billion of announced acquisitions Hitachi has been involved in over the last three years, according to data compiled by Bloomberg, with the biggest being last year’s $1.25 billion purchase of units and assets from Accudyne Industries.
The deal is the latest major overseas transaction by a Japanese company as financing costs remain low. Takeda Pharmaceutical Co. is on course to complete its $62 billion takeover of Shire Plc after shareholders cleared the deal this month. In October, KKR & Co.’s Calsonic Kansei agreed to acquire car-parts maker Magneti Marelli from Fiat Chrysler Automobiles NV in a deal valued at 6.2 billion euros ($7 billion). Daikin Industries Ltd. last month agreed to buy Austrian commercial refrigerator maker AHT Cooling Systems GmbH in a deal worth about $1 billion.