ABB Ltd., the world’s largest maker of power-distribution equipment, agreed to buy Thomas & Betts Corp. for $3.9 billion to expand its North American distribution network and boost sales of low-voltage gear.
ABB offered $72 for each share of Memphis, Tennessee-based Thomas & Betts, the Zurich-based company said in a statement today. That’s 24 percent more than the close on Jan. 27. ABB is paying cash for the target, and said the deal will be accretive within the first year after closing.
Thomas & Betts marks the second major acquisition for ABB under Chief Executive Officer Joe Hogan, who joined in 2008 from General Electric Co. The U.S. is the world’s largest market for low-voltage gear, which is ABB’s most profitable line of equipment, and Hogan said the purchase will help his company build critical mass and distribute its products in the region.
“This fills one of the largest gaps in the company, which was not having a meaningful presence in the world’s largest low-voltage market,” Hogan said on a call with journalists.
ABB shares fell 1.4 percent to 19.15 Swiss francs at 12:02 p.m. in Zurich trading, giving the company a market value of 44 billion francs ($48 billion). The stock has risen 0.9 percent in the past six months, compared with a 5.5 percent drop in the 98-company Stoxx 600 Industrial Goods and Services Index.
Competitor Siemens AG lost 18 percent in the past six months, while Thomas & Betts rose 19 percent.
Hogan already bolstered ABB in the U.S. with the January 2011 purchase of Baldor Electric Co. for $3.1 billion. Baldor had revenue of $1.7 billion from industrial motors and drives in 2010 and strengthened ABB in automation, where it competes with Siemens. Thomas & Betts is estimated to report 2011 sales of about $2.3 billion, ABB said. ABB is still on the lookout for additional deals, though nothing is imminent, Hogan said on the call today.
ABB has said purchases may boost annual sales growth by as much as 4 percent until 2015. The company has allocated as much as $18 billion for possible deals over five years from 2011, and said today it’s still at the low end of that range.
The Swiss company estimates the purchase will double the size of the low-voltage market in North America that will be open to its products to approximately $24 billion. Previously, its revenue in low-voltage in the region was just $240 million.
Hogan’s acquisition push contrasts with that of Siemens CEO Peter Loescher, who has refrained from major transactions in past years and wrote down the value of some acquisitions. Siemens reported earnings last week that fell short of analyst estimates and cautioned that reaching its goals this year will be challenging. ABB reports fourth-quarter profit on Feb. 16.
The deal is the third-largest by a western European industrial company since the beginning of last year, according to data compiled by Bloomberg. ABB is offering 1.73 times Thomas & Betts’ revenue in the transaction, compared with the median multiple of 1.19 for 49 industrial acquisitions, the data show. The average premium paid was 25 percent, according to the data.
“The price for sure is not cheap,” said Richard Frei, an analyst at Zuercher Kantonalbank. “But a company with as good a performance and market share like Thomas & Betts simply doesn’t go cheap.” He said ABB will probably sell some parts of Thomas & Betts’ product portfolio.
ABB plans to reap about $200 million in annual cost savings from the transaction by 2016, mainly from sourcing and purchasing. Hogan has cut more than $3 billion in costs in recent years by streamlining sourcing and moving more production to emerging markets. This year, he’s seeking $1 billion in savings. ABB will have about $80 million in implementation costs linked to the synergies, as well as $120 million in one-time charges, it said.
Thomas & Betts Chief Executive Officer Dominic J. Pileggi will be in charge of a new global business unit, ABB said. Profitability of its low-voltage gear is similar to that of ABB’s own offerings, with margins as high as 20 percent, ABB Chief Financial Officer Michel Demare said on the press call.
The two sides worked for about a year to get to know each other and make the deal happen, Hogan said.
Thomas & Betts was founded in 1898 as a sales agency for electrical wires and raceways, and its products are used in the telecommunications, construction and power utility industries. Now it makes cable ties, connectors and steel boxes that house electrical wiring, with 9,400 people generating revenue of about $2.3 billion last year.
“The timing for any such transaction is near perfect into what look like the beginnings of strong upturns in U.S. utility and construction markets,” Scott Davis, a New York-based analyst with Barclays Plc, wrote in a report yesterday. “Cross-border M&A with European companies buying U.S. assets also makes strategic sense as a logical hedge against softening European markets and a weakening currency.”
Among Thomas & Betts’s products are also towers for electrical power transmission and a business that produces heating, ventilation and air conditioning units, which ABB said will be new areas to its own line-up of products. Hogan said he’d consider the future of these lines at ABB.
ABB was created in 1988 from the combination of Asea AB of Sweden and Switzerland’s BBC Brown Boveri. Investor AB, the Swedish Wallenberg family’s holding company, remains ABB’s largest shareholder, with a stake of about 7.2 percent.
Hogan has made the Americas one of his main regions in which to pursue growth in power systems, discrete automation and low-voltage products. By 2015, ABB wants to generate as much as 30 percent of revenue from the region, compared with 19 percent in 2010.
Buying Thomas & Betts will give ABB access to a network of more than 6,000 distributor locations and wholesalers in North America, a strategy ABB already pursued with Baldor as it sought to expand its regional footprint.
The company has said that it will continue to focus on power and automation and doesn’t intend to divest assets. Davis said the electrical equipment industry has “long struggled with scale issues, global coverage, and pricing power.”
For Thomas & Betts, ABB has set up a $4 billion financing commitment from Bank of America Merrill Lynch, which will be repaid through a combination of cash and the issuance of debt, it said. The bank also advised ABB on the purchase.