ABB Ltd. (IW 1000/110) will keep and expand its power grids division, defying Swedish activist shareholder Cevian Capital AB’s calls for the Swiss engineering company to spin off the unit.
“It was a long journey, and the answer today is very clear: ABB will retain this business,” Chief Executive Officer Ulrich Spiesshofer said Tuesday in Zurich at a capital markets day, where the company also announced a plan to buy back $3 billion of shares from 2017 to 2019.
ABB’s decision on the unit brought to light deep divisions between the company’s biggest shareholders, with Investor AB backing the move and Cevian co-founder Christer Gardell calling it “unfortunate.”
ABB shares rose 1% to 22.23 Swiss francs at 11:49 a.m. in Zurich, taking gains since the start of the year to 24%.
ABB’s Spiesshofer and Cevian have been sparring over the structure of the Swiss maker of power and automation equipment. Cevian has urged ABB to carve out and list the power grids business, saying ABB is too complex and difficult to run. Spiesshofer has made management changes, lowered costs and last month agreed to sell a niche high-voltage cable operation within the division. That sale, representing only 5% of the unit’s revenue, failed to appease Cevian.
"We believe ABB is worth more kept together than divided into pieces," Investor President Johan Forssell said in an interview, adding that the Swedish shareholder with a 10.5% stake backs ABB’s board and concluded “continuity creates more value.”
Structural improvements are highly significant."
— Morgan Stanley analyst Ben Uglow
For his part, Cevian’s Gardell said in an e-mailed response to questions that ABB is a “collection of top-quality businesses whose performance has been hindered for many years by the company’s conglomerate structure.”
ABB’s Spiesshofer was left to explain on Tuesday how he is navigating the shareholder divide. He characterized conversations with Cevian and Investor early in the day as “friendly and open,” although he declined to give any details on what was said.
“A couple of weeks ago, I spent three hours in the evening with Christer Gardell. I spoke to him this morning. There’s a lively exchange going on,” the CEO said. “That does not mean we take the recommendation of every shareholder; that’s not the way we run ABB.”
Microsoft teams up with ABB to create 'one of world's largest industrial cloud platforms' - CNBC: CNBCMicroso... https://t.co/FW3Nqrv6cU— Stanley Suen (@stanleysuen) October 4, 2016
ABB said its strategic portfolio review concluded that keeping power grids will “unlock maximum shareholder value” compared with options like a sale, spinoff, joint venture or initial public offering. The power grids unit, which sells equipment to utilities, will have two new partnerships in offshore wind and electrical substations, which will help increase its margin target to as much as 14%, ABB said.
ABB will continue with active portfolio management which includes “strategic additions” and “pruning non-core businesses.” The engineering company said it will also consolidate all of its brands around the world under one umbrella, a transition that will take two years.
“Structural improvements are highly significant,” Morgan Stanley analyst Ben Uglow wrote in a note to investors. “Longer-term shareholders should generally be encouraged.”
Cevian, which holds about 6% of ABB shares, found support for a breakup from shareholder Artisan Partners Ltd., with managing director David Samra saying ABB’s current structure lacks focus, according to an interview in Swedish newspaper Dagens Industri.
In a one-page document outlining its stance, Cevian has said ABB post-split would be worth 35 francs a share and the operation would “enhance focus, reduce overhead costs, and create a more nimble, pure-play company.” The weak operational performance of ABB and power grids over the last eight years has shown “the costs of complexity are too high,” it said. On Tuesday, Gardell said the board and management team “will be held accountable for realizing” the 35 franc a share value.
In response, Spiesshofer said Tuesday a value of 35 francs a share is “a target that is acceptable” and reachable at the company’s own pace.
Power Grids Least Profitable
Power grids was created as a unit at the start of this year but pro-forma figures for 2015 show it was the least profitable of ABB’s four divisions with operational earnings before interest, tax and amortization making up 7.5% of sales. Under the plan unveiled Tuesday for the division, ABB raised its margin target 200 basis points to between 10% and 14%, effective 2018. ABB said it was reaffirming all its other financial targets with the company as a whole seeking a margin in the range of 11% to 16%.
ABB’s chances of hitting the upper side of a group margin target have improved, the CEO said.
ABB also struck a deal with Microsoft Corp. to shore up its capabilities in the so-called industrial Internet market. The companies have previously worked together in areas such as robotics, power grids, and e-vehicle charging.
By Alice Baghdjian, Sheenagh Matthews and Aaron Ricadela