(Bloomberg View) -- Activist investors want one of Switzerland's biggest companies to break itself in two. The logic for separating ABB is hard to fault.
Stockholm-based Cevian, a 6 percent shareholder, says ABB is too complex and blames this for the shares' underperformance over the last five years. It is pushing for the power grids unit, which services electricity utilities and is behind one third of sales, to be demerged. Such a move would leave the remaining group focused on electrification and automation systems (think industrial robots).
The hope is that management would find it easier to focus, and make better and faster decisions. In addition, the separated shares might command higher earnings multiples because investors prefer simpler investment stories.
At first glance, the argument seems strange. ABB has four divisions -- not many for a so-called conglomerate. And stock-market investors are perfectly capable of valuing companies with different business activities. A degree of diversification cushions individual businesses against external shocks.
What's more, ABB's enterprise value to forecast Ebitda multiple is 10.3 times. That looks favorable beside Schneider's 10.1 and Siemens' 9.6. A split would also add some cost due to the need to create another head office, never mind the one-off expenses, as well as creating uncertainty. Many analysts see no upside.
In spite of this, Cevian reckons ABB would be worth 35 Swiss francs a share, against 21.6 Swiss francs today, in a break up. To get there you have to assume that a demerged structure would work wonders both for the ABB's performance and investor popularity. Managers would have to get margins in all businesses to match the best of their peers, admittedly the current aspiration. These turbo-charged income streams would then need to command leading stock-market ratings in their respective sectors.
Can't ABB achieve this performance uplift in its current structure, and get rewarded for it by the stock market, without a break-up?
Possibly. There's no magic cost cut or revenue boost from a demerger.
But it's just more believable that ABB could achieve its aims as separate, focused businesses with their own leadership. The fact is that ABB comprises a set of quite diverse, and individually complex, businesses that when combined are a challenge for any board to get its head round. The potential for an uplift in shares is evident looking at focused automation and electrification peers like Rockwell Automation and Legrand, which trade on 11.3 and 13.4 respectively.
ABB will reveal results of Power Grids review on
ABB has been conducting a strategic review, and is due to update investors on Oct. 4. If it doesn't unveil a demerger, it will need a convincing plan for delivering a twin boost to performance and its shares -- and hold its managers to account to deliver it.
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