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ABB’s future in doubt amid profit and asbestos fears

Shares in ABB plunged on Tuesday Keystone Archive

ABB stocks have plummeted to their lowest level ever, amid a fresh profit warning and worries about the group's asbestos exposure in the United States.

Nervous investors – fearful that the Swiss-Swedish engineering giant faces collapse – slashed the group’s share price on Tuesday more than 60 per cent to SFr2.05 ($1.36).

The collapse in the company’s share price continued on Wednesday, as ABB’s chief executive, Jürgen Dormann, attempted to calm investors by denying that the embattled group was threatened with bankruptcy.

By the close of the trading day, ABB shares had fallen more than 20 per cent to SFr1.63 ($1.09).

“We have good contacts with our banks. They are accompanying ABB in a constructive manner and they will stand by us throughout this,” Dormann said in an interview with the Swiss newspaper, “Finanz und Wirtschaft”.

On Tuesday, ABB shocked an already unsettled market by cutting its profit targets just weeks after Dormann insisted that earlier growth forecasts for 2002 were realistic.

Analysts have warned that the collapsing share price puts new strain on the company’s already-massive SFr4.1 billion debt burden, leaving it vulnerable to disintegration.

“It may not have a future,” says Andres Gujan, an analyst at Zurich’s Vontobel Bank.

Sword of Damocles

Much of the share rout has been fuelled by news that the group is considering bankruptcy protection for its US subsidiary, Combustion Engineering (CE) – a boilermaker bought by ABB in 1990 and now facing massive asbestos-related claims.

Dormann says the troubled Connecticut division faces a $1 billion liability from thousands of claims by former workers.

ABB says the asbestos liability now exceeds CE’s book value of $812 million.

Dormann moved to side-step fears that the liabilities could flow to the parent company.

“It is ABB’s position that CE’s asbestos-related liability can only be asserted against CE,” he said.

“ABB will not go bust,” he said.

US move just a legal stopgap

But according to Gujan, many observers remain doubtful that ABB will be quarantined from its US damages.

“This chapter 11 scenario for Combustion Engineering is a tactic by ABB’s lawyers,” Gujan told swissinfo. “We believe that the US courts will finally make ABB, as a parent company, liable for the asbestos problem.

“[And] that means that further provisions are necessary. And ABB cannot afford that.”

News of the asbestos manoeuvre came at the same time as Dormann pushed back the group’s target of a four to five per cent profit margin in 2002.

Dormann says the company’s belief in an economic up-turn during the second-half of 2002 was unrealistic.

“As a result we are lowering our outlook for earnings,” he said.

The profit revision has damaged investor trust in Dormann, who became the group’s combined chief executive and chairman in September.

On taking up the CEO post, Dormann sought to ease market jitters by promising that the group’s 2002 forecasts were not threatened.

“A profit warning two days before the third-quarter report destroys any credibility that’s left for ABB’s management,” says Henrik Moberg, from Fisher Partners.

“It’s a complete U-turn since the last telephone conference [in September].”

Facing “junk status”

The latest developments have also stoked speculation about the company’s long-term future.

Once a powerhouse blue chip that traded well above SFr50 per share, ABB has seen its market value collapse by two-thirds this year. And that was before Tuesday’s crunch.

Swiss, and international investors ditched the stock en masse. Morning trade on Switzerland’s SMI exchange saw ABB equities collapse to an all-time low of SFr2.49.

For a company desperately working to support $3.7 billion in debts – a falling share price puts new pressure on the group’s lop-sided equity ratio (currently around seven per cent) – and increases the likely need for future re-financing.

Moody’s Investor Service, which assesses company debt risk, on Tuesday relegated ABB’s debt status to its lowest ranking – a move that will only increase the group’s financing costs.

The service also warned that ABB’s rating might be even further reduced – to what the market sees as “junk-grade”.

Terminal decline

Some analysts are starting warn that problems at Europe’s biggest engineering group are terminal.

“It’s not so much a question of whether ABB will drop out of the SMI, but whether the company will still exist in one year’s time or so,” says Gujan.

“These are problems facing ABB [that] are threatening its existence.”

Gujan says ABB’s assets now outstrip the value implied by its share price.

“But on the other hand the company does have a huge liability… and it could increase in the future.

“And then of course the assets would be worth less than liabilities and that would mean bankruptcy.”

swissinfo, Jacob Greber

The company is facing over 100,000 asbestos claims.
ABB posted net profits of $101 million in the first half of 2002.
The company’s share price dropped about two-thirds in value this year.
ABB has operations in Europe, the United States and Asia.

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