Off the grid

ABB's $4-bn grid sale is key to reinvigoration

Swiss engineer ABB is in strategic review mode. As demand growth slows, it wants to take $1 billion from overall annual costs. Given the strength of the headwinds it is experiencing elsewhere in its large empire, ABB might also conclude it is better off without its power grids unit.

Across the board, the engineer is being hobbled by muted investment in the oil and gas industry due to the low oil price. Slowing growth in China and other emerging markets hardly helps. Divestment of the grids division would see ABB offload a business accounting for 16 per cent of overall revenue and a third of the company's order book. But it is a unit that operates on relatively low profit margins and is risk-prone.

The unit, a supplier of power and automation systems employing 39,000 people, has long been ABB's least impressive division, suffering from operational and cyclical issues. For the last few years, it eked out a pitiful average operating margin of less than three per cent. Botched offshore wind park projects in the North Sea knocked a $500 million hole in ABB's group-wide 2014 profit. A radical restructuring in 2014 brought stability. But ABB still expects the business to remain the least profitable one going forward.

Helped in part by the strength of its order book and the success of the restructuring, UBS estimates that ABB's grid operations are worth about $4 billion. ABB is not short of cash but extra resources would underpin M&A ambitions that could, in time, be rekindled.

ABB, which counts activist fund Cevian as a five per cent shareholder, might also hand back more cash to shareholders. Despite paying out $3.5 billion to investors over the last 12 months, ABB's shares are down more than 13 per cent in the same period, underperforming Siemens. A forward price-earnings ratio of 15.3 still implies an 18 per cent premium on its German rival. Part of that premium may be explained by hopes that ABB's across-the-board strategic review will lead to an earnings bounce. That recovery might be stronger if ABB was smaller.