Morningstar | 'Tis the Season to Break Up Conglomerates: ABB's Power Grids Sale Welcome News; Shares Attractive
ABB's sale of 80% of its power grids division to Hitachi offers modest upside to our fair value estimate, and we expect to make adjustments that will result in less than a 5% increase to our CHF 25 and $25.40 fair value estimates. The sale is welcome news, given that power grids muddied the investment story as a division that offered no real synergies with the more attractive automation and low-/medium-voltage portfolio. The deal price of an $11 billion enterprise value (based on 100% of the division) looks reasonable at an 11 times enterprise value/EBITA multiple, based on PitchBook data for comparable deals and traded companies. While the transaction focuses the investment thesis, we do not expect any changes to ABB's competitive positioning, and we retain our wide moat and stable trend ratings. We continue to see the shares as attractive.The company is expected to announce a strategy update in February with its full-year results. We suspect the update could include more cross-selling initiatives amongst the remaining divisions and a greater focus on expanding its robotics division. The applications for robotics are expanding through end-market expansion but also added value from software. It remains to be seen, however, if any of the large robotic suppliers (including ABB, Kuka, Yaskawa, and Fanuc) can offer a point of real differentiation. That's something we will be interested to hear more about at the strategy update.
The power grids division sale is expected to close in the first half of 2020. After the transaction closes, the company expects to return the $7.6 billion-$7.8 billion cash proceeds potentially through a buyback. ABB will retain 20% with an option to sell the remainder after three years. Until closure, deal costs will dilute EBITA dilute by 70-100 basis points, partly from accounting rules requiring costs associated with the transaction to be reported in operating expense. The deal is a positive but doesn't materially change our view.
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