Tokyo (SCCIJ) – The days of the Swiss industrial icon ABB in its present form may be numbered. A sale or partial sale of the power grid division which contributed 29% of the Swiss giant’s sales in 2017 looks to be imminent. According to media reports, discussions with potential buyers from Japan or China are said to have progressed. The main issues seem to be the price tag of the division and whether ABB may need to keep a majority or minority part in case there is no buyer for the whole unit. Conservative estimates assume a division value of about $11 billion. Others see the “fair value” rather at $12 billion or $ 13 billion.
Leading global supplier
ABB is the world’s leading supplier of high-voltage transmission equipment and products through its Power Grid Division. ABB is also a leader in the sale of high voltage direct current (HVDC) transmission equipment. If potential buyers come from Asia, there is a good chance that they will be at home in Japan. A spokesperson of Mitsubishi Electric which is rumored to have some interest told the SCCIJ that they have not been asked by ABB for sales talks. Nevertheless, the company would certainly be a good choice as a buyer. The often underestimated Japanese group has sufficient financial strength to take parts or all of ABB’s power grid business.
ABB current converter
Focus on energy management
However, Mitsubishi has in the past not opted for large foreign acquisitions and has preferred organic growth. Its energy and electrical division’s products include transformers, control units and other network components. This division recently generated sales of 1.2 trillion Yen, around a quarter of the group’s income, although the actual transmission of electricity has so far been a rather small field.
This division is focused on power plants and energy management, including smart grids for electricity from renewable sources. For example, Mitsubishi was recently commissioned to provide controlling equipment for the world’s largest energy storage facility in Hokkaido. This enables that future offshore wind farms can be integrated into the grid. Mitsubishi’s acquisition of ABB would also make sense if the Japanese could sell more of its own components. But ABB covers this business itself.
Joint venture of Hitachi and ABB
Hitachi Group, the second candidate in Japan, is roughly twice as large as Mitsubishi Electric in terms of sales. Thus, it could easily stem a big billion-dollar purchase. The extent of overlaps with ABB in electricity grid components such as transformers is difficult to estimate. Technologically, Hitachi would be particularly interested in ABB’s proprietary technology for high-voltage direct current, especially since it has a joint venture with ABB in the Japanese electricity sector since 2015.
This involves high-voltage direct current systems with which remote solar power plants and wind farms at sea can be connected efficiently and fluctuations in feed-in electricity can be better controlled. Hitachi holds 51% and ABB 49% of the shares. The Swiss supply the technical components and the know-how. Hitachi is responsible for installation and maintenance. The power plant and power transmission business is a pillar of Hitachi’s growth strategy.
Division revenue is expected to grow by 60% to 120 billion yen within three years. A merger with ABB would therefore be of interest to the Japanese. On the one hand, Hitachi has been regarded as cautious since the financial crisis brought it into trouble. That could mean that Hitachi favors to take a minority stake. On the other hand, with sales of 9.4 trillion euros, the ABB division has a margin of more than two points above the Hitachi Group’s average of 7.6% (2017) which makes a takeover very attractive.
Text: Martin Fritz for SCCIJ; Photo: ABB
