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September 12, 2015

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State Grid may bid for ABB power grids business

THE Chinese state grid operator’s hunt for US$50 billion in overseas assets makes it a potential bidder for ABB’s power grids business in what would be another step toward creating a dominant supplier of global electricity infrastructure.

Swiss engineering group ABB this week announced US$1 billion in cost cuts, possible layoffs and a fusion of its low-margin Power Systems business with Power Products, which makes transformers. A review on whether to keep this newly created Power Grids unit and its US$12.6 billion in revenue is under way.

With Swedish activist investor Cevian — which owns 5.2 percent of ABB’s shares — breathing down his neck, Chief Executive Ulrich Spiesshofer must close a profitability gap to rivals like General Electric.

Selling Power Grids could help, since its profitability is only a third of ABB’s best performing divisions.

Potential buyers include State Grid Corp of China, looking to amass US$50 billion in overseas assets by 2020 in a diversification push. Several analysts who follow the industry identify State Grid as a potential buyer.

“Strategically, the Chinese government has set aside markets they want to dominate,” said James Stettler, an analyst at Barclays Capital in London. “They’re thinking big.”

State Grid, which distributes electricity to 1.1 billion people across 90 percent of China, is seeking to tap into steady income streams.

As well as expanding Chinese influence, its relatively low yield requirements give it an edge over Western infrastructure funds and European sector rivals.

State Grid has already moved into countries including Portugal, Italy, Brazil and Australia.

UBS estimates that ABB’s grid operations are worth about US$4 billion. ABB declined to comment and there was no immediate response from State Grid’s European office.

Investor pressure

Spiesshofer, in the role for two years, is under pressure to improve margins in the medium term after trimming revenue growth targets this week.

Cevian typically aims to double the value of investments in as few as three years. Its ABB stake is now worth 2.2 billion Swiss francs (US$2.3 billion), but ABB shares have fallen some 10 percent since Cevian announced its move in June.

Spiesshofer said this week that all options are open for Power Grids — a sale, breakup or acquisitions.

“We will say what is the best way of running this business in the future ... in terms of adding to or departing from parts, and what’s the best ownership structure,” Spiesshofer said.

The division employs 39,000, and utilities are its main customers. Its operations include high-voltage transformers, substation equipment like gas- and air-insulated switchgear, microgrids, as well as a high-voltage direct current business and services.

If Spiesshofer does decide to unload it, Asia is home to other potential bidders. These could include Japan’s Mitsubishi Heavy Industries or Hitachi, with whom ABB has a partnership as the country seeks a post-Fukushima solution to moving electricity around the nation.

The sector is consolidating. General Electric won approval this week to buy Alstom’s power business. The GE-Alstom combination is a rival to ABB Power Grids, as is Japan’s Toshiba and Germany’s Siemens.

A Toshiba Corp spokeswoman said the company was still interested in expanding in the global power transmission and substation business and saw M&A as a possible way to achieve that, but declined to comment on ABB.

A Mitsubishi Heavy company spokesman declined to comment.

A spokesman for South Korea’s Hyundai Heavy Industries says the company was currently not keen in the unit.

State Grid’s expansion

Snapping up ABB’s power grids business would give State Grid an important foothold in the European Union power equipment market.

Unlike Western firms, State Grid both builds and operates power grids.

In recent years, it bought 25 percent of Portuguese power grid operator REN and 35 percent of Italy power and gas grid holding company CDP Reti. Stakes in power grids in Brazil, Australia and Asia, have taken it halfway to its US$50 billion overseas goal.

State Grid, whose Chinese grids span thousands of kilometers from hydro dams in the west to population centers on the east coast, is a specialist in ultra high-voltage lines which lose less power than the lines in use in most of Europe.


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