ABB Defies Cevian in Keeping Power Grids as Battle Lines Drawn

Updated on
  • Biggest shareholder Investor AB backs management’s plans
  • Cevian calls decision to keep division “unfortunate”

With a pledge to hold on to its business making power grid equipment, ABB Ltd. has won a round in a protracted battle with Swedish activist shareholder Cevian Capital AB, which wants the Swiss engineering company broken up.

ABB said Tuesday that keeping the power grids division will “unlock maximum shareholder value” compared with options like a sale or initial public offering. While it sweetened the announcement with $3 billion buyback of stock, the news did little to excite investors, with the shares rising as much as 1.6 percent in Zurich.

Ulrich Speisshofer

Photographer: Jason Alden/Bloomberg

“There’s a lively exchange going on,” Chief Executive Officer Ulrich Spiesshofer said Tuesday in Zurich about discussions with Cevian. “That does not mean we take the recommendation of every shareholder; that’s not the way we run ABB.”

ABB’s defiance in the face of Cevian came after months of behind-the-scenes sparring over the structure of the Swiss maker of power and automation equipment. It also revealed deep divisions among shareholders after Cevian 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 percent of the unit’s revenue, failed to appease the Swedish investor.

ABB’s decision on the unit brought to light a schism between the company’s biggest shareholders, with the larger Investor AB backing the move and Cevian co-founder Christer Gardell calling it “unfortunate.”

ABB shares rose 0.5 percent to 22.09 Swiss francs at 2:31 p.m. in Zurich, taking gains since the start of the year to 23 percent.

"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 percent stake backs ABB’s board and concluded “continuity creates more value.”

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.

Long Journey

“A couple of weeks ago, I spent three hours in the evening with Christer Gardell. I spoke to him this morning,” the CEO said. The period of consultations on the division was “a long journey, and the answer today is very clear: ABB will retain this business.”

Cevian’s shareholder activism at ABB is typical of a strategy it has carried out at other European industrial companies in a bid to create value by separating disparate units. Cevian’s influence at Finland’s Metso Oyj and Germany’s Bilfinger SE led to both companies splitting into parts. With a 6 percent stake in ABB, Cevian would need support from other large shareholders to be able to push through its plans. It currently isn’t represented on the board.

For more on Cevian’s investment strategy in Europe, click here

Cevian 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.

Portfolio Pruning

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 percent, ABB said, adding that it will continue with active portfolio management which includes “strategic additions” and “pruning non-core businesses.”

The engineering company also said it will consolidate all of its brands around the world under one umbrella, a transition that will take two years, as well as adjusting the make up of some of its divisions and renaming some of them.

“Structural improvements are highly significant,” Morgan Stanley analyst Ben Uglow wrote in a note to investors in which he called the debate over power grids a side show. “Longer-term shareholders should generally be encouraged.”

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 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, taxes and amortization making up 7.5 percent of sales. Under the plan unveiled Tuesday for the division, ABB raised its margin target 200 basis points to between 10 percent and 14 percent, 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 percent to 16 percent.

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.

— With assistance by Veronica Ek, and Albertina Torsoli

(Adds background about Cevian in 11th paragraph.)
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