Did ABB Pay Too Much for GE's Fixer-Upper?
The multiple on the deal to buy GE's industrial solutions business is in line with the multiples paid by ABB for other deals in the past five years, but for one of the least profitable businesses.
In some ways, ABB (ABB) has bought a fixer-upper in General Electric's industrial solutions business, and not at a trough price, as we would have liked, but at a midcycle multiple for a business that, while strategically important, will take some time to turn around. The $2.6 billion acquisition announced Sept. 25 will fold GE’s industrial solutions business into ABB’s electrification products division and is important because it tilts ABB’s North American offering toward solutions rather than products, in line with the change in end-market demand. The deal is expected to close in the first half of 2018 and is subject to regulatory approvals. We do not expect a significant change to our $24 fair value estimate for ABB on the back of this deal. We retain our wide moat rating.
The deal multiple of about 12 times enterprise value/EBITDA is in line with previous ABB deals and Schneider’s Asco acquisition earlier this year but for a lower-margin business. The GE industrial solutions business' 8% EBITDA margin is less than half of Asco’s and several hundred basis points below that of ABB’s electrification products division. Using PitchBook data, the deal multiple is in line with the multiples paid by ABB for other deals in the past five years but for one of the least profitable businesses. Power-One and Thomas & Betts were both bought at 12 times but with 11%-17% EBITDA margins. GE underinvested in the business, causing a decline in market share, and so ABB will have to refresh the product portfolio and restructure the business at a one-off cost of about $400 million. From this, ABB expects to eventually get about $200 million in annual cost synergies. We find that synergies often disappear before they appear and are difficult for companies to track, so we don't plan to explicitly model in the full amount. However, we do see potential for some margin improvement in GE’s business, given the relative weakness versus peer margins, and ABB’s own.
Morningstar Premium Members gain exclusive access to our full analyst reports, including fair value estimates, bull and bear breakdowns, and risk analyses. Not a Premium Member? Get this and other reports immediately when you try Morningstar Premium free for 14 days.
Denise Molina does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.