(Bloomberg) --Hitachi Ltd.’s takeover of ABB Ltd.’s power grid division for about $6.4 billion would be the Japanese conglomerate’s biggest-ever deal as it shifts focus from nuclear plants to the higher-growth market for electricity networks.
Hitachi agreed to acquire 80.1% of a business with an enterprise value including net debt of $11 billion, it said in a statement Monday. ABB will keep the remaining stake and plans to return as much as $7.8 billion to investors through a buyback or other measures.
The move will advance Hitachi Chief Executive Officer Toshiaki Higashihara’s efforts to overhaul the diversified company and become a top provider of grid equipment as prospects for nuclear power are increasingly uncertain. The ABB division makes transformers, long distance electricity-transmission systems and energy storage units. Its sale will leave the Swiss engineering giant more concentrated on robotics and automation.
The companies said last week they were in discussions on changes within their existing partnership. Following the unveiling of the deal, Hitachi shares fell 1% in Tokyo, valuing the company at about $27 billion, while ABB rose 1.1 % in Zurich.
The deal will make Hitachi “the world leader” at a reasonable price, Higashihara said at a press conference in Tokyo, adding that more acquisitions could follow.
ABB will have an option to sell its remaining 19.9% holding three years after the deal is completed, which isn’t expected before the first half of 2020. About $500 million in non-operating restructuring charges will be made in the next two years, ABB said.
The divestment was applauded by activist investor Cevian Capital AB, which became a major ABB shareholder more than three years ago and has pushed for a break up of the company. 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.
The moves unveiled Monday “are the right steps in the development of ABB, and enhances ABB’s long-term competitiveness,” Cevian said in a statement, adding that it fully supports the strategy of the company’s board and management.
ABB said it will now focus on four leading sectors and simplify its organizational structure. It pledged to disclose more details at its fourth-quarter earnings announcement in February.
Spiesshofer’s stance on power grids changed this year after the value of the 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%, the lowest of its four units.
“Now is the right time,” the CEO told reporters on a call after the sale was announced, adding that no “major” job cuts are planned. The companies have had a partnership within the division since 2014.
The acquisition will bolster Hitachi’s position in the growing power transmission and distribution sector, a market it estimated will grow to $100 billion by 2020 and benefit from demand for electric cars, storage batteries and renewable energies. 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.
The deal will 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 also the latest major overseas transaction by a Japanese company. 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.
UBS acted as sole lead financial adviser for Hitachi, with Goldman Sachs also a financial adviser. Credit Suisse Group AG and Dyal Co. also acted as financial advisers while Freshfields Bruckhaus Deringer LLP were legal advisers to ABB